How to Teach Your Teen About Credit

How to Teach Your Teen About Credit

As the younger generation becomes more and more adept at technological processes earlier in life, some parents struggle with the idea of too much independence too soon, especially when it comes to money management. While allowing your child to independently make decisions about money they earn or receive as a gift may seem concerning at first, it may benefit them later in life to begin managing their finances and understanding credit early.

As they transition into becoming more independent with their finances, they’ll likely be faced with taking out student loans for college or considering applying for their first credit card.

Although you don’t want your child to rush into loans or credit cards that they’re not ready to manage, establishing a credit history as a young adult can benefit them as they begin to contemplate any upcoming major purchases, such as a house or car. That means the best time to teach your teen responsible money habits is while they’re still at home.

Check out this infographic on how to teach your child good money habits.

Talk to Your Teen About Credit

Financial education is important to solidify good money management. And, as with many other things, education about managing money often begins at home. Take time to sit with your child to go over their financial accounts and help them plan out spending, saving, and giving.

You can discuss purchases they’ve made with their debit card and make sure they comprehend the link between their PSECU debit card and their PSECU account.

A debit card links to their account, which limits their purchases to the amount of money they have in their account. It’s an excellent way to start them off and give them independence to manage their spending money. At PSECU, you can be listed as a joint owner on your child’s account to make it easy to monitor their spending habits.

The lessons you teach them about managing a limited amount of money and monitoring their accounts will set a good foundation for them when they become a young adult and are ready for their first credit card.

Most teens don’t need any loans until they head off to college or begin working after high school. However, when that time comes, you may want to consider helping your child choose a credit card that’s a good fit for them so they can begin learning how to use it responsibly.  If your child is 18 and you feel they’re ready to handle the responsibility, this may be a great time to get them a secured credit card. This type of credit card is secured by cash in a separate account and can have a very low spending limit. As long as it’s used properly and payments are made on time, it can help your child get a head start on building good credit.

If you decide to consider this path, here are a few tips to get your teen ready for their first credit card.

 

  • Educate Them

 

Learning about credit scores and how to manage money is vital for positive long-term spending habits. Your child’s knowledge will pay off in the end with higher credit scores when you teach them the basics of earning, spending, and saving.

It’s never too early, so begin talking about finances as soon as you think it’s necessary. Pre-teens can understand what it means to owe money, so integrate the topic of credit when they begin to pick up on things. Make sure they know how to use a credit card responsibly before they take on their own.

 

  • Teach Them How to Check a Credit Score

 

Teach your teen how to check a credit score. It’s important to guide them first-hand, as they may not have classes offered at school. Many teens don’t have a credit score yet, as they have no borrowing history that can be reported. If you’re comfortable sharing your own, you can show them how you’re able to monitor it using the PSECU app. You can talk to them about how a credit score is calculated and what factors impact it.

 

  • Open a Secured Credit Card With a Low Limit

 

When the time is right, apply for a secured credit card. A secured credit card gives your child the opportunity to have a limited budget, which is based on how much they put down as their security deposit. For those who don’t have a strong credit score, or any credit score at all, a secured card will help them establish credit.

The lower limit will teach them patience and the ability to budget what they need without overspending. Remind them to make on-time payments and pay their bill off in full so they don’t lose money on unnecessary interest charges. They can build a higher credit line over time if they’re responsible for their payments and spending habits.

 

  • Notify Them of the Significant Responsibility

 

Educate your teen on what to use credit cards for and how not paying their bill on time would cost them money.  You can show them our compound interest infographic to help explain how interest from debt adds up over time. In addition, just as good habits with a secured credit card can help your child, bad habits can hurt them. Not paying bills on time will only negatively impact their credit, and letting interest accrue will cause them to lose money unnecessarily.

Learn When Your Child Might Be Ready for a Credit Card

Parents know their child best when it comes to their strengths and weaknesses. Let your gut guide you in identifying when it’s the right time to help them apply for a PSECU secured credit card if they’re 18 or older. It may come along with college or high school graduation and serves as an effective way for them to pay for any emergencies.

Signs they may be ready include that they:

  • Can budget money when it comes to saving and spending
  • Can explain how a credit card functions
  • Have basic knowledge of money management
  • Are honest about their funds and ask questions when confused
  • Are reliable and regularly meet deadlines

A Secured Credit Card With PSECU

If you’re a PSECU member, anyone in your household is eligible for membership, as well. Visit us online to open an account or learn about other financial tips that can help you and your teen on the path to financial success. For more information on a PSECU secured credit card, please contact us.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. PSECU does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs or websites. PSECU does not warrant any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of the information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal or other professional if you have questions.