As teens start to come into their own during these formative years, parents have an opportunity to further their teens' personal growth through sound financial habits. In just a few short years, these young adults will be opening their first checking accounts and applying for their first credit cards.
Parents must guide teens through such financial topics as debit cards versus credit cards, credit scores, APR rates, building credit, and online security.
Here are several points to go over with your own teenager.
Young adults opening their first checking accounts will receive a debit card to use at stores, e-commerce sites, and ATMs. Debit cards are directly tied to their checking account balance.
You can teach your teen the fundamentals even earlier by opening an account in both of your names. This account should have a minimal, starter balance and be strictly used for financial learning.
Next, deposit a small amount of money on a secured card to teach your teen about credit. Every month, they have to pay the balance on what they spent. This will set them up for good credit card habits.
Don't hesitate to discuss the reality of bad credit, including causes and strategies for payment plans and building credit back up. You could mention that getting a credit card with bad credit score ratings is possible, but responsible payment habits are vital. Discuss how high-risk credit customers are subject to higher interest rates.
You could also open a credit card as an authorized user and put your teen's name on the account. It's a good way to monitor your teen's credit habits (and build a credit history) until they're ready for their own credit card.
Discuss credit scores with your teen and how these scores are a measure of financial health. In the U.S., this score is a three-digit number that doesn't exceed 850. In countries in the UK, the score can reach 999, depending on the credit bureau or agency.
Discuss how good credit scores lead to lower interest rates on loans, like car loans or mortgages.
One of the most important credit topics for your teen is APR, which stands for annual percentage rate.
The APR is the annual cost of borrowing credit. Illustrate how APR is applied, and by paying a credit statement in full every cycle, your teen pays zero interest. If they only pay the minimum amount required, they'll have to pay interest, and ultimately, more money in the long run.
A golden rule for building credit history is to pay on time in full. Teach your teen about spending limits. There are financial apps designed for teens that track and estimate spending.
How do you help your teen avoid maxing out their credit card? Tell them to spend just 30% or less of their credit limit.
Automatic payments and alerts can also prevent missed payments. Teens should know about fees for late payments and how they add up quickly!
Digital privacy has never been more important. Take this opportunity to discuss the importance of online security with your teen.
Your teen should never disclose their bank or credit card details through social media, email, or DMs. Show them how to create strong account passwords. They should know to never input credit or account details while using public Wi-Fi.
Teens must avoid websites without SSL certificates; web browsers like Chrome block these sites.
Teach your teen about buyer protection for credit cards and how to report a credit card when it is lost or stolen.
Help your teen make the most of these formative years by setting them on the right financial path.
Start with "training wheels" accounts to model good spending and payment habits. Ensure they have a solid understanding of credit scores, building credit history, APR, and digital security.
Supriyo Khan
Supriyo Khan
Supriyo Khan
Supriyo Khan
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