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.
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.
Avoid interest repayments
Interest is what a borrower pays a bank or other lender for using their money. The rate varies depending on the financial institution and the type of account. Even if your adult teen has an interest-free credit card they need to ensure certain conditions are met – anything bought outside these terms will accrue interest.
In a nutshell:
- Pay off the balance in full and on time – interest won’t be charged.
- Pay the minimum repayment each month – interest will be charged on anything left owing.
- Miss the repayment date or minimum repayment amount – typically a late fee will be charged, plus interest on everything owing.
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.
Keep the future in mind
When the time comes for your child 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.