Responsibility is a key lesson for teenagers, and a big part of financial responsibility is managing credit. Although legally a person cannot apply for a credit card in their own name until they’re at least 18, teaching your teenager these tips can help give you confidence that they’ll make the right decisions once they’re able to apply.
1. Understand what ‘credit’ means
This will probably seem obvious for those who’ve been using a credit card for years, but clearly defining credit as something that has to be repaid, usually within a certain timeframe, is important. If your adult teen doesn’t repay debts on their credit card on time, this can lead to penalties and also impact their credit rating.
2. Getting interested in interest
The key thing to teach them about interest is that borrowing money from the bank is essentially a service that you pay for – it comes at a cost. Also, the longer someone takes to repay their credit, the more interest they’re likely to pay back overall.
3. Avoid interest repayments
Interest is what a borrower pays a bank or other lenders for using money that has been borrowed. The rate varies depending on the financial institution and the type of account.
To avoid interest you can:
- Take up a card that doesn’t charge interest. CommBank has two interest-free cards CommBank Neo and StepPay.
CommBank Neo is an interest-free card with no late fees or surprise charges. Just a simple monthly fee.
StepPay is a way to buy now, pay later where you split purchases of $100 or more into four, everywhere. Late payment fees will apply, but we have limits in place so fees are capped. Fees and charges may also apply to your linked CommBank account. - Make the most out of your card’s interest-free period. Most personal CommBank credit cards offer up to 55 days interest free on purchases (effective 1 May 2024, the interest free period on purchases will change to up to 44 days for Awards Standard, Gold Awards, Platinum Awards, Smart Awards, Diamond Awards, Ultimate Awards credit card). This mean that you won’t pay any interest if you pay your balance in full every month. But remember – anything bought outside these terms may accrue interest.
In a nutshell:
- Pay off the balance in full and on time – interest won’t be charged.
- If you pay the minimum repayment each month – interest will be charged on anything left owing.
- If you miss the repayment date or minimum repayment amount – typically a late fee will be charged, plus interest on everything owing.
Most personal CommBank credit cards offer up to 55 days interest free on purchases (effective 1 May 2024, the interest free period on purchases will change to up to 44 days for Awards Standard, Gold Awards, Platinum Awards, Smart Awards, Diamond Awards, Ultimate Awards credit card).
4. Use credit only for purchases
Withdrawing cash from a credit card will incur a fee. Cash advances or ATM withdrawals on a credit card also incur higher interest rates than card purchases. Explain to your teen that ideally they should use a debit card for cash transactions, and reserve their credit card just for purchases.
5. Keep the future in mind
When the time comes for your teen to take out a personal loan or a home loan, a healthy credit history can make a big difference. Make sure they understand that decisions made now could impact their future. Using credit wisely and making repayments on time is a good demonstration of financial responsibility to prospective lenders.
6. Borrowing the right amount
Your teen probably knows not to borrow more money than they can afford to pay back, but it may be easier for them to decide how much to borrow and how much they can repay if shown how to set a budget. Doing this gets them into the habit of putting money aside to pay for things.
There is no better practice than a real life example. If they want to borrow money from you to buy something like a new mobile phone, sit down with them and go through their income and outgoings, and work out what they’ll need to set aside each week to pay you back.
You can also get them thinking about future financial circumstances and how any changes, such as changing casual jobs, could affect their repayments. Getting in the habit of doing this any time they borrow money will help them avoid borrowing too much when they’re older.
7. Credit history matters
What your teen should understand about credit history is that being financially responsible now, will impact any future applications for personal credit. They can start to build a healthy credit history by using their bank account on a regular basis and by not allowing it to become overdrawn.
When your teen opens their bank account they can get a debit card to pay for things themselves online or in store. This can also help demonstrate they have strong money management skills, which will help build a positive credit history for the future. Once they do take out credit, to maintain the good history they have built up, they’ll need to make sure they meet their repayments and don’t overspend.
8. Not all credit is the same
There’s a big difference between borrowing money using a credit card and through a personal loan, so your teen will need to consider their circumstances.
With a credit card they’ll be given a credit limit. They will be charged interest on whatever credit they spend on their card and don’t repay within the billing period. Credit cards tend to be used for things they want to buy now and pay back at a later date.
As outlined above, CommBank has two interest-free cards - CommBank Neo and StepPay. These are alternatives that may be considered.
A personal loan on the other hand is where they will borrow a fixed amount over a set period of time for a certain interest rate. This might be more suitable for larger ticket items such as a car.
While it’s valuable teaching your teen about credit so they can make responsible choices for the future, a long-term savings plan is also another good option for financing those bigger ticket items.
