Having heard stories about individuals who had gone bankrupt or retired broke because of the use and abuse of credit cards, you may find yourself discouraging your kids to avoid using credit.
But while ‘stay out of credit cards’ is a well-meaning advise for the new generation of young adults and teens, it is also unwise as credit cards are already entrenched in American life. Someday they will have their own plastic and be left to their own devices. The key is to teach them while they are still under your tutelage so they can avoid getting into debt early.
Best Approaches to Teach Teens on How to Handle Credit Cards
Teach them how to manage their own cash or savings account first
Money management is where many people fail at that’s why they have debts they can no longer pay. Why do other people who have big paychecks still get buried in debt? Poor money management skills.
When it comes to credit cards, one of the ways you can tell that your kids will be able to properly handle credit is the way they handle their own cash or savings account. If they can do so without draining their budget or savings, they stand a good chance against the temptation of an actual credit card.
So teach your kids to properly handle their own money first before they are allowed to handle money from creditors. Help them open an account, set up their budget, practice balancing their own checks, etc. Your goal is to instill in them the importance of careful spending so that when they’re out on their own, in a college far away from home, they won’t become a slave a credit cards.
Talk about money matters
Apart from your other parent-to-child conversations, have a regular money talk with your kids, once a week or once a month, whatever fits you. It could be as simple as lessons about saving, budgeting, investing and spending – lessons that will make them conscious about how they manage their own finances. You could even teach them how they can contribute to the family’s finances by saving energy at home, or buying less toys or gadgets than last year.
The challenge, however, is how to get them interested in money talk. While other kids seem to be naturally interested in the subject of money, most are not, especially that they usually do not have an idea or actual experience yet in earning, budgeting and spending. They do not know yet how important it is in real life.
Teach them the value of credit
Credit is a privilege, not a right, that’s why not everyone has it. Having credit gives you access to someone else’s money for you to use and repay later. It gives you convenience in purchasing and paying, it’s handy in times of emergencies, and affords you to acquire things that might be too expensive for cash.
It is, therefore, important to value your credit and the underlying relationship with your creditors. By maintaining credit – good credit, for that matter – you will be able to negotiate better interest rates on your future transactions such as mortgages and personal loans, etc.
Your kids need to understand the value of credit so they won’t be scared of owning a credit card. They have to be able to see it as a tool that will help them as adults. Otherwise, they would be missing out on possibilities afforded by a great credit standing.
Encourage responsible use of credit card
Handling credit cards responsibly is a tough challenge for many. A lot of people treat credit as if it’s their own cash and that’s where trouble begins.
This is also the pain point which you should emphasize to your kids before it’s too late. Discuss to them in plain language how credit card interest works, how it can work against them and how it has sunk other people into debt in such a short period of time. Teach them the fundamentals that every wise cardholder should know: what’s a float period, how to avoid finance charges, why they should not pay only the minimum, what types of card to avoid, when to take a cash advance or balance transfer, etc.
Get a secured card
Having a secured credit card is a good training ground for your teens because secured cards are safer. With a secured credit, the most that they can spend is limited to the amount in their savings account. Should they fail at secured cards, the stakes are not that high yet.
It may be true that experience is the best teacher but in the case of handling credit, experience may be too costly. Others learn it the hard way, i.e. after they have incurred huge debts and felt the pain of paying it off.
Remember that financial education happens at home, not at school. Help your teens become smart at handling credit so they can avoid the debt trap in the future.