Teenagers start with a clean credit slate but can easily land in credit card debt without proper guidance. Parents can help their teens with building good credit and a positive financial future with these steps.
Teens Building Good Credit Habits Instead of Credit Card Debt
If you are a teenager in high school or heading to college, now is the perfect time to start building a positive credit history. Learning a few key principles will help you to avoid unnecessary credit card debt down the line. Parents, here are a few ways to teach your teens about credit.
Starting With Credit
One option for kids under 18 is to have them practice using credit by borrowing money from their parents. Set up a credit limit, repayment terms, and a standard interest rate to familiarize them with these concepts.
If they miss a payment, charge a small late fee. This will help teach them the cost of credit and the habit of paying on time. It will also help them learn the basics of credit before mistakes can harm their credit report, credit score and cause real consumer debt.
Have Your Teenager Open a Bank Account
If your child understands that credit is not “free money,” and credit balances need to be paid in full each month, consider having your teenager open a bank account. Make sure to have them complete the paperwork and ask questions for the experience.
The bank account should have a debit card. This way, the teen will experience the feeling of a credit card without totally relying on credit. Since the debit card directly withdraws from the checking account, it impacts their liquid assets day-to-day while still building a credit history.
Get Your Teen a Credit Card With a Small Credit Limit
Once your child has seen the impact of spending and banking with a debit card, the next step might be a credit card with a small credit limit. This additional layer of personal finance is a low-risk way to get practice using credit.
Even if your teenager makes a mistake and spends more than they can pay off in a month, the small limit should still make repayment manageable, although longer and a little more costly than intended. They will then learn how interest and missed payments can result in consumer debt. It’s just another lesson on the road to building good credit.
Teach Credit Scores & Credit Reports
Credit scores and credit reports are other teachable areas for parents and teens. Explaining the concepts, visiting Annualcreditreport.com for their credit reports, and requesting credit scores are very important elements to walk through as credit becomes more prevalent in their personal finances.
Starting teens with a strong foundation of good credit and financial habits can help ensure a successful future relationship with money. For more information on credit and financial concepts for youth, visit ACCC’s resources on Youth & Money.