From the moment you bring your child home from the hospital, you take on the responsibility of protecting them. Despite the fact that they are nothing but a bundle of blankets – and still can’t move far of their own free will – you ‘baby-proof’ your home to guard against danger. Gates over the stairs, covers over electrical sockets, guards around the fireplace. Nothing is getting past you.
As they get older, your task of mitigating risk grows as quickly as they do. And, whatever you do, it will often feel futile. Despite your best efforts, they will want to somersault off the lounge within a few centimetres of the coffee table. They’ll want to run with scissors, stick Lego up their nose, climb bookcases, and launch themselves out of trees.
Moving on up the years, you pull back on protecting them from more tangible dangers. If you give them a knife to cut something, they’re more than likely to come away with all ten digits intact. If they go to the park to ride their bike, more often than not, they come back in one piece. They have learned from both their victories and their tumbles to become smarter humans who can assess risk and deal with it accordingly.
So, what about money? While there’s plenty of effort that goes into traditional schooling, money lessons can often go by the wayside. For kids to learn about money, they need to be taught how it works both in theory and in practice. They have to have those same victories and tumbles they experience elsewhere, while we mitigate their risk by controlling what they’re exposed to.
Starting out by earning pocket money, they can build the blocks of sensible saving and spending wisely. From there, their learning can move on to how to manage money and how to operate within a cashless system. As they get older, bigger lessons will come into play, covering everything from credit and debt, to interest and investing.
And credit cards? While many parents want to protect their kids from credit cards in the same way they protected them from kitchen knives as toddlers, simply saying something is out of bounds is not a great strategy in the long term. As kids grow into adults, they may want their own credit card. Isn’t it better they go into that decision with the knowledge and skills they need to mitigate their own risk?
In this post, we’ll cover all you need to know about teaching your kids about credit cards. From starting out with a debit card, to adding them to your account as an additional cardholder, to helping them apply for their own card when they hit 18, we provide all the essential info you will need to impart as a parent to help them develop a healthy relationship with credit.
While coins and notes provide a great starting point for little kids to learn about money, you may want to move into the world of digital transactions as they get older. As adults, we shop online and we tap-and-go at the checkout, using cards and digital wallets to pay way more often than we use cash. So, it only makes sense we prepare our kids for this concept of cashlessness.
If you think they’re responsible enough, you could start them off with their own debit card. A number of banks offer debit cards for kids, but most have age limits that apply.
What each card offers in the way of parental controls depends on both the account and the bank. Features may include spending controls, spend tracking, limits on types of transactions, and card locks. Let’s look at the CommBank Smart Access Account for Youth as an example.
Designed for 9-14 year olds, this account can only be opened by a parent or guardian (from 14 and up, kids can open the account themselves). As a parent, using your own CommBank app, you can:
After you pay their pocket money straight into their account, your child can then can see their balance, transfer savings into their Youthsaver account, and keep track of their money using their own CommBank Youth app.
Providing an alternative option, there are also pocket money apps offering linked cards and wearables, such as ZAAP and Spriggy. These work in much the same way as bank-provided debit cards, but without the age limitations.
Obviously, this isn’t something you ‘set-and-forget’. You don’t simply provide your child with a debit card and leave them to their own devices. On the back end, you mitigate their risk, perhaps by limiting the amount of money they have to play with, or how much they can spend each week. You may also choose to limit where they can spend or access their money.
But, you also have to tell your kids why you’re doing that. Why you’re acting responsibly on their behalf now, so they can learn to do it for themselves later on.
With you as their guide, your child can use their debit card and linked account to learn how to track their spending and spend within their means, watching closely as to how their purchases affect how much they have left in their account – and how much they have left over for saving. This can be a valuable lesson for kids who tend to think of their parents as bottomless ATMs.
And going cashless? Even as adults, many of us struggle with the disconnect we experience when we pay digitally, either by card or with a digital wallet. We are not handing over physical cash, so we don’t feel like we are losing anything. We tap and it’s done. It’s so easy to forget that that tap either lowers the balance in our account, or is an amount we have borrowed and will have to pay back in the near future.
But, as we teach ourselves to pay more attention to our digital purchases, we can also teach our kids. Using the tools we have available, we can show them how to track their purchases and actually pay attention to each one. We can encourage them to make the effort to think of each tap as a tangible transaction, and to consider how it will impact their remaining balance.
Using online budgeting tools can also help – both you and your kids. Involve your child in the process, so they can see how much money you have coming in, and where it needs to go. You can then work out together how much you have available to spend on fun things, or where you might need to cut back now, so you can enjoy a larger fun experience in the future.
When your child hits 16, it’s more than likely they will already think of themselves as an adult. As such, they may feel they’re ready to move on from debit to credit. As you will be the ultimate judge as to whether that’s true or not, here are some questions you may want to ask before you sign them up as an additional cardholder on your credit card account.
As long as you think they’re capable, you can sign them up as an additional cardholder. Before you hand over that plastic though, there are a few things to keep in mind.
At 18, your child is legally an adult – and as such, can apply for their very own credit card. Again, you may have your own thoughts on whether they’re ready to take that step, but it’s up to you as a parent to guide them as best you can. Here are some factors to keep in mind as you compare the options and apply.
Once your child has applied and been approved, try to follow that up with some gentle guidance. While they may not appreciate being told what to do at that age, they will likely appreciate falling into debt a lot less.
When your child applies for a credit card, they will have to meet certain eligibility standards set by the card provider. As we mentioned already, that will likely include bringing in a certain amount in income, and having a steady job so that they can repay what they borrow. On top of that though, they will have to demonstrate a certain level of creditworthiness.
Which is where their credit report comes in. On assessing each application for credit, providers check the applicant’s credit report and credit score to determine how responsible they are with credit. If the applicant has a history of late or missed payments, that display of irresponsibility could lead the provider to reject the application. On the other hand, a sparkling credit report would likely lead to the application being approved.
What about if your child has no history with credit at all? Unfortunately, this can have the same effect as having bad credit. They are an unknown quantity on which the provider may not want to bet.
If your child has had no dealings with credit, you may want to advise them to start out small before applying for a credit card, using a phone contract or something similar to build their credit over time. Alternatively, you could look at ‘first’ credit card options that specialise in providing credit cards to applicants who are new to credit.
The good news is that once approved, your child can use their credit card to build their credit. With each payment made on time and in full, their credit score will start to feel the effect, so that in time, it should be much easier to get approved for other forms of credit.
On the flip side, irresponsible use of their credit card will damage their credit, making it much harder to get approved in future. Drill into them this concept, and if you can, try to keep in touch with how they’re going with their card spending and repayments to make sure they’re keeping on top of it all.
As you introduce your kids to credit, there are some lessons that need drilling in more than others. Here are some of the most important ones.
✓You are using the card to borrow money – and that service comes at a cost. Instead of letting your kids think – as they so often do – that credit cards are magic, make a point of telling them you are, in fact, borrowing money and you will need to pay it back at the end of the month. If you don’t pay it off, you will have to pay interest, which will grow and grow over time.
✓ You are limited in how much you can spend. Again, this is not magic money. Your card provider assigns you a credit limit. If you spend over that limit, you will have to pay hefty fees.
✓ Your credit limit is not a challenge. Just because you can spend up to that credit limit, doesn’t mean you should. The more you spend, the more you have to pay back – along with interest if you fail to repay your balance at the end of the month.
✓ Spend within your means. Know your balance, and think carefully before making a purchase. Don’t be influenced by advertising – or what your friends are buying – and only spend what you can afford to pay back in full at the end of the month.
✓ Don’t rely on your card. Don’t spend all the money in your everyday account, knowing you have your credit card as backup.
✓ Take advantage of interest free days. Most cards offer a certain number of days interest free when you pay your closing balance in full by the statement due date. This can help keep your costs down, as you keep on top of your debt.
✓ Make your repayment on time, every month. Set a reminder or set up a direct debit to make sure you make your repayments by the due date. Late payments can result in a fee, and may be recorded in your credit report.
✓ Your actions impact your credit. Being smart with your card and always making your repayments on time should allow you to improve your credit score over time. Missing repayments and defaulting on your card will lower your credit, making it harder to get approved for credit in the future. These actions will stick with you for some time, so make it count.
Pauline is a personal finance expert at CreditCard.com.au, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.
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