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Using Credit Cards to Teach Kids About Money
Smart Money

Using Credit Cards to Teach Kids About Money

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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.

Money Matters

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.

Starting Out with Debit

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.

    • With an ANZ Advantage Account, kids 12-14 can open an account online, but they must be aged 14 or over to receive a Visa Debit Card.
    • With a Bendigo Bank Student Account, kids can open an account in their own name from age 12 to use an Easy Money Card. From 16, they can access a Debit Mastercard.
    • With a CommBank Smart Access Account for Youth, kids 9-14 can open a ‘joint’ account with a parent or guardian to access a Debit Mastercard. Over 14s can open an account in their own name.
    • With an ING Orange Everyday Youth Account, kids 15-17 can open an account in their own name to access a Visa Debit Card.
    • With a ME Everyday Transaction Account, kids 16 and over can open an account in their own name to receive a Visa Debit Card.
    • With a NAB Classic Banking Account, kids 14-16 can open a ‘joint’ account with a parent or guardian to access a Visa Debit Card.
    • With a Westpac Choice Account, kids can open an account in their own name at age 12 to receive a Handycard. At 16, they can access a Debit Mastercard.

 
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:

    • Track your child’s spending and saving.
    • Change their weekly spend limit.
    • Lock contactless card payments, online payments, or your child’s card completely at any time.

 
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.

 

Learning Money Lessons

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.

    • You can sit with them as they check through each of their transactions, pointing out how each purchase reduced the amount of money they had in their account. As you do this, you can talk about how important it is to check their transactions regularly, making sure there aren’t any that they didn’t make themselves.
    • You can encourage them to set their own spending limits, and to think carefully before they use their card to buy stuff. This could involve checking their balance before making a significant purchase, to consider whether they will have enough left over to buy something else they want later on that week, or further down the line.
    • In terms of saving, you could discuss the idea of transferring a certain amount of their pocket money into their savings account each month. You could ask them to set a savings goal, which you reward when they reach it.

 
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.

Going Cashless

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.

Moving On to Credit

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.

    • Can your child pay off their bill? Whether they have a job, or they’re still receiving an allowance, your child should have the means to repay what they spend on your card account. If not – and you simply pay off their spending for them – the lesson of spending within their means will likely be lost on them. This reduced responsibility could lead them to overspend on their own card when they’re older.
    • Can you limit their financial risk? As an additional cardholder, your child has the potential to spend up to your credit limit. Before you sign them up, you may want to check if your card provider offers card controls such as card locks and spending limits so you can minimise the risk of your child running up debt you can’t pay off.
    • Is your child trustworthy? Some kids can be trusted to handle responsibility from an early age. Others may be forgetful, careless or just too darned cavalier in their attitude. If you think your child still has some growing to do before they can be trusted with a credit card, explain your reasoning to them and set them tasks to help them move forward.
    • Have you taught your child about how to use a credit card? While a credit card may look like a debit card, it’s important you teach your child the difference before letting them loose with credit. Teach them about credit limits and interest, and how to avoid paying interest and fees by being smart with their card.

 
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.

    • Set boundaries. Explain what you expect from your child. If you want them to repay what they spend, advise them when that payment will need to be made to avoid interest accruing. This may also involve helping them set spending limits.
    • Set card limits. If your account allows, set spending limits on the additional cardholder account. You may also be able to limit certain types of transactions.
    • Track their transactions. Make a habit of checking through your child’s transactions together. Use this opportunity to discuss whether each purchase was a good one, or whether they could perhaps make better choices in future.
    • Make them accountable. Work with your child to determine certain outcomes if they misuse their card. If they overspend, you may choose to lock their card until they can repay what they owe. If they make a habit of making bad purchases, you could suspend their card use for a certain amount of time.

 

 

Their First Credit Card

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.

    • Eligibility: One of the first things you both will have to consider during your search for a credit card is whether your child is eligible to apply. Most card providers require applicants to be at least 18, and an Australian citizen or permanent resident. However, there may also be requirements regarding income and employment. Look for cards with a low income requirement, and bear in mind most card providers want applicants to have a history of steady employment.
    • Annual Fee: Most credit cards in Australia charge an annual fee – but, there are plenty that don’t, so check out cards with no annual fee, or opt for one with as low an annual fee as possible. As they learn to navigate the world of credit, the last thing they need is to have a hefty annual fee they have to cover each year.
    • Interest: The path to learning about credit may not run smooth, which is why it’s a good idea to choose a credit card with a low interest rate as your child finds their feet. Instil in them the importance of clearing their balance each month to avoid paying interest, while having the backup of low rates should they not be able to manage it on occasion.
    • Features: Ideally, a first credit card should be basic. Rewards encourage spending, which is not something you want in a learner credit card holder. Similarly, perks can cloud focus on what’s really important: learning how to spend wisely and pay back what you owe promptly.
    • Introductory Offers: While it’s good to take note of intro offers, its not a good idea to get swayed by them. If the right card has a worthy offer, awesome. But explain to your child why they shouldn’t choose a card simply for its offer. It’s what the card provides long-term that counts.

 
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.

 

Building Credit

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.

 

Passing On the Important Stuff

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.

 

Founder - Roland B Bleyer

Roland Bleyer

Founder of Creditcard.com.au. Roland has extensive knowledge about credit cards in Australia. Known as a credit card expert, he has been featured on tv and in various publications. Some popular offers on our site right now include the ANZ Low Rate. This special offer has no annual fee first year, a low purchase rate and long 0% balance transfer. Have a look also at the huge 0% for 30 months balance transfer from Citi with no balance transfer fees.

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