Credit Cards for Kids – When to Start Talking to Your Kids About Credit and Debt
Did you know that there are credit cards for kids? Before you go out and get one for junior, it’s important to have a good talk about credit cards and debt. As a parent, talking about money can be difficult. It’s awkward, it’s not always easy to explain, and kids might tune out because they think it’s boring.
Even with the difficulties, explaining how credit cards work could help your children avoid major credit card debt in the future. Set your kids up for success with these guidelines for how — and when — to explain credit cards in your family.
Credit Cards for Kids – Guidelines for Teaching Teens
As your child gets older and heads into their teenage years, you can begin talking more in-depth about credit cards. Here’s a basic timeline that could help you bridge the subject of credit and debt with your teen:
- Age 14: Your child’s classmates might have access to a card from their parents. Your child is probably going to see their peers using a plastic card to pay for things. This makes it vital that you address how credit cards work so they understand credit cards aren’t free money.
- Age 16: Encourage your teen to open a bank account with a debit card for real-world experience with cards. A debit card is swiped like a credit card, but money is withdrawn from the bank account immediately. This helps them to equate the use of the card with the reduction of funds.
- Age 18: Your older teenager probably has a few years of experience managing their own money. If they don’t have a credit card yet, now could be a good time to talk with them about getting one. Whether they get their own or you add them to your account, try setting some rules in place to help reduce the chance of overspending, like only using the card for gas.
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Remember that each child is different. Your child might be able to handle credit cards responsibly during high school. Or, they might need more time for you to help them understand credit cards and how dangerous credit card debt could be.
Even if your kid seems to have it all together, they still need your guidance as misusing credit can have long-term consequences that a teenage mind isn’t fully capable of grasping yet.
How To Explain Credit Cards to A Child
An easy way to explain credit card basics is to tell your child or teen to think of them as a loan:
- When you swipe a credit card, your credit card company loans you the money to pay for your purchase.
- All of your purchases in a certain period make up the amount of your “loan.”
- You pay back the money you’ve borrowed over the previous period.
- If you don’t pay it back in full, you’ll be charged interest on the leftovers.
For example, you make four purchases of $25 each in a month. Your total credit card balance, or loan amount, is $100. If you pay the $100 in full, you won’t owe interest on the money you borrowed. If you pay $75, you’ll be charged interest on the remaining $25.
Your teen might think their credit card “loan” is unlimited. That’s where you should bring up credit limits. Explain to your teenager than a credit card limit is the maximum amount of money they can borrow on their card. Once they reach the limit, they won’t be able to make additional purchases until they pay down their balance.
Let’s say your teen has a credit limit of $300. They max out their credit card by buying $300 worth of goods. A few days later, they pay $100 toward the card. Their current balance drops to $200 and they have an additional $100 worth of credit available to spend.
However, be sure to explain that maxing out a credit card isn’t a good idea. Not only does it mean you’ll have a bigger bill, but it can hurt your credit score. Having good credit is helpful on their path to success. Your child will need a good credit score to get the best terms on a car loan, private student loans, or a home mortgage in the future.
How to Explain Different Types of Credit Cards
Not all credit cards are created equal. When talking to your teenager, consider using these straightforward explanations on different credit card types.
Secured Credit Cards
This type of card requires you to make a cash deposit into a holding account, like a savings account. That deposit works as collateral in case you can’t pay your bills in the future. Once you’ve proven you’re able to pay your bills each month, your credit card company will refund your deposit amount.
Unsecured Credit Cards
Unsecured cards don’t require a deposit for approval. This is the type of card you probably think of when you think of a credit card. These cards might have rewards or cashback programs and tend to have higher credit limits.
Many student cards are unsecured credit cards that feature low credit limits and high approval rates. They’re designed to be an introductory credit card for young adults. Some student cards include an automatic credit limit increase after a set period of making on-time payments.
How do I teach my child responsibility about credit card use?
One of the most important things you can do to help your child avoid bad credit card debt is to explain what not to do. Bad credit card habits could lead to long-term struggles with debt that require outside help from a debt relief company, like United Settlement.
Help your children succeed by explaining they should never:
- Miss a payment. On-time payments, even if it’s just the minimum amount, are the biggest factor in your credit score. Teens should always try to pay their balance in full.
- Throw out unread statements. Going over their statements helps them see where they’re spending money and gives them a chance to check for fraudulent charges.
- Max out a card. Not only does maxing a card mean your teen can’t use it in an emergency, but they could also hurt their credit score by using too much of their available credit.
Some Final Thoughts on Talking About Credit Cards to Kids
Find out what works for your family. You know your children better than anyone, so it’s important that you consider individual factors when talking about credit cards. No matter your approach, the more you talk about credit cards and debt, the more you set your child up for success.
Guest author Marcel Bluvstein graduated Touro College with a BS in Business Finance & Marketing. Marcel continued his education at Harvard University, studying Strategic Management for Growth Companies. Prior to United Settlement Marcel worked at Rodman & Renshaw a full-service investment bank.