It’s been about 2 weeks now since I encouraged you to work on a budget plan with your teen. How is it coming? Did you work on your own budget plan as a result? Has your teen brought up other questions related to money management topics? If so, congrats because this means your teaching and exposure to a new adult life skill is working! Now, let’s get onto Part 4 … credit.
Here is what I know for sure …
Credit is all around your teen and they are very aware of its perks and benefits. However, many teens are not always aware of the strings and responsibilities that are attached to getting, building, and using credit. Additionally, they are not versed on how credit works beyond the swiping or inserting of a plastic card into a little machine. But you can change that.
Also, teens often believe credit is a good thing to be used a lot or a bad thing to be avoided completely (especially when it comes to credit cards). You can change this too by stressing to your teen that credit, in and of itself, isn’t a negative thing. It is the misuse of credit offerings that can become a problem for many people—educating yourself is key.
Concepts to cover regarding borrowing money (i.e., credit) …
- Definition of Credit
Make sure the teen you are working with understands credit involves good faith and the willingness of one party (whether it is a bank, credit union or a grandmother) to provide resources (usually money) to another party (you) in exchange for the promise of repayment (or return of a resource) according to the terms agreed upon. More simply put, credit is getting something now with the promise to pay later.
Credit is a form of a contract. It has a timeframe outlined, allowing delayed payment when a person doesn’t have cash readily available or doesn’t want to pay in cash. To the lender (banks, merchants, credit card issuers, grandmothers, etc.), credit represents a trust that the borrower will repay as the borrower has the burden to “settle-up” … and they must do just that. Borrowing money doesn’t differentiate between small, low cost items and large, expensive items either.
As part of defining credit, discuss the “5 C’s” of credit (character, capacity, capital, collateral, conditions). Inquire as to how your teen believes they would do if a lending institution would evaluate them via these factors. Is there an area (or areas) that as an adolescent they could be working on to improve? Are there any real life examples you (or someone you know) has endured that could shed light on the importance of making sure these conditions are intact before seeking credit?
- Additional definitions of credit related terms
Before a teen should be allowed to use any type of credit, they need to understand basic terms like Principal (amount of money borrowed), Interest or finance charge (charge for the use of credit; borrowed money expressed in a percent), Compound interest (interest paid on both the principal and on accrued interest, as of a specific date, but has not been paid to a lender or borrower), and Simple interest (interest paid on only the principal). More in depth conversations would include things like dating terms, security deposits, down payments, term vs. revolving credit, etc. However, you will have to reference L.I.F.E.- Independence Readiness for more, as space isn’t going to permit that here.
- Introduce Credit Cards
As I stated earlier, credit card familiarity is often already part of a teen’s life. They have either watched you use yours or have borrowed your card and used it themselves. So, the “use” isn’t what I want parents and mentors to focus on here … we need to make sure our youth knows “how” credit cards work.
Start with explaining how revolving credit cards operate. Stress these are the general purpose cards offered by major companies. Each month a statement outlines the total charges and requires payment in full or a minimum payment with the remaining balance rolling over to the next month. No deposit is needed, and credit limits and interest rates vary. (Introduce Reward, Secured, and Specialty cards as you see fit.)
Make sure teenagers understand how credit card companies make their money. Explain how by charging interest to individuals who do not pay in full each month allows card companies to stay in business, but they have other ways to stay afloat. Make sure your teen knows that some card companies charge a yearly fee to own their card, but not all do … so look for those offerings. And be clear that credit card companies charge a fee (1% – 4% on each transaction) to merchants who are allowing customers to use a credit card within their establishments.
Show your teen examples of cards you have and share a copy of a statement with them. Review all parts of this bill, but be laser focused on the crucial data points (new current balance, minimum balance due, payment due date). And don’t hesitate to tell a few credit card horror stories. Reality and truth make for impactful long-term learning.
- Discuss credit vs. debit cards
It always has amazed me that teens seldom understand that debit cards remove money immediately from a bank account and credit cards are on a monthly credit cycle, so make sure yours has clarity. Also, point out that debit cards offer little protection for fraudulent actions and it is crucial to monitor account balances to ensure there is money in a bank account before using a debit card (as it is an instant transaction). Many teens will use their debit card, then go to the bank to make a deposit only to find they have incurred a service charge for insufficient funds (Yikes!). Service charges sometimes end up being much greater than the cost of the initial purchase which makes for a sad day!
Credit cards, on the other hand, give you more time to pay. Each person’s “billing cycle” provides a month-long period of spending before the transactions are totaled and a bill is sent requiring payment. Additionally, some credit cards offer consumer protection against lost, damage, or erroneous charges and cash back rewards, so inquire when applying.
- Discuss and/or apply for a credit card
Once a teen becomes of working age and certainly before leaving home, they need to apply for a credit card (or at least know how) in my opinion. Review procedures (including age restrictions) and applications together. Compare rewards, interest rates, billing cycles, etc. and stress the benefits of using a card and paying in full each month as a great way to build a good credit score, reduce overspending, and avoid interest charges.
Conclude this dialogue by talking about ways to combat credit card fraud, what to do if your card is declined, how to ensure a card holder can pay this credit card bill monthly, and anything else you feel your teen needs to know. (Again, more on this subject can be found in L.I.F.E. book 3 https://learninginfoforeveryday.com/shop-here/)
- Explore what your teen knows about Venmo, Zelle, Paypal, etc.
It is quite possible that your teen knows more about these types of money transfer services than you do … and that is perfectly OK! In fact, this would provide a wonderful opportunity to let your teenager enlighten you on a money management matter, so go with it.
In a perfect world, introducing concepts related to loans (car, house, college, business, etc.) would come next in your discussion. However, my guess is that by now, both you and your teen are exhausted and need a break. So, circle back to loans at a later date.
Look for Part 5 — Introducing Credit Scores coming soon and make the most of your day!
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