It’s not at all uncommon for teenagers to receive credit card offers in the mail. Are your children prepared for this? Do they know what to do with these offers? Do they understand how credit works? According to Consumer Action, it’s up to you to teach them: “Parents are usually the best people to teach their kids about credit, and since even young children can use credit cards, it’s never too early to begin this education.”
In many families, if the parents don’t take the time to teach their kids about credit, those kids may end up making naïve choices that affect them for years to come. That’s why it can be a good idea to sit down with your kids and discuss basic facts about credit now, whatever their ages. And if you’re wondering how to do this most effectively, here are some suggestions about topics to consider addressing:
Sharing a Family Account: In the United States, most credit card companies won’t offer individual accounts to teens under the age of 18, but they will allow minors to join their parents’ accounts. Should you choose to allow your child to join your account, it’s important that you communicate your expectations regarding purchases. “Only the primary account holders [i.e., you] are legally responsible for making payments,” says Consumer Action. “If the primary account holders fail to make payments, their credit history will be damaged. Depending on the issuer, the additional cardholder’s credit may suffer, too.” In other words, if your child racks up a high bill on your shared account, you, as the primary account holder, will be financially responsible — and unpaid bills can affect both your and your child’s credit. For this reason, if you go this route, I suggest that the credit line you have on this account be small initially. As your child demonstrates responsibility the line may be increased.
The Truth about Minimum Payments: As every credit card holder knows, credit companies usually require a minimum payment each billing cycle, which works out to be a certain percentage of the total payment due. While this may sound convenient, help your teenagers understand that only paying the minimum payment means continually adding to the total amount of interest you pay. Some teens may not realize how credit card interest is calculated or how a few purchases can wind up costing much more.
Why Credit History Matters: When you’re 15, a future with bad credit may not sound like such a big deal, and that’s why parents must explain the reasons credit history matters. Does your child want to get a job, an apartment, a car or a house someday? Show him or her why credit factors into these desires.
Credit Card Alternatives: Credit cards are not the only option for convenient payments, so alert your teen to other good options such as the following:
- Debit Cards: Linked to a checking account, a debit card can be used to make purchases, as well as to access cash at the bank. But unlike a credit card, debit cards only allow purchases for existing money, so there’s no option to rack up a bill to pay later.
- Charge Cards: Charge cards allow holders to charge purchases, paying each bill in full at the end of the month.
- Prepaid Cards: Sometimes called “stored-value cards,” prepaid cards are cards that you load with a set amount of money and then use the way you would use credit or debit cards at the store.
Once your teenager reaches the age of 18, he or she becomes a legal adult and has the ability to apply for credit without your knowledge or consent. What’s more, you can expect offers of credit to come their way over time. By talking with your kids now, you set them up to make smarter financial decisions and know how to use credit responsibly.