While you may take care of your child’s expenses for the first part of their life, eventually they’ll want to save money and make purchases of their own. Although some parents worry their teen will have spending problems, it’s still essential to teach them how to create responsible spending habits while they’re still under your roof.
For instance, a credit card can have a positive or negative impact on their finances, depending on what kind of spending habits they adopt. Wondering if a credit card is a good idea for your child and, if so, how you can use it to help them build their financial knowledge?
When Should You Give Your Teen Access to a Credit Card?
It can be tough to know when your child is ready for a credit card. After all, many teenagers will start spending left, right and centre as soon as they’re able to, especially considering how easy credit cards are to use. That said, this irresponsible behaviour may simply be due to their lack of financial know-how.
In fact, according to a Canadian Financial Capability survey conducted by the Financial Consumer Agency in 2019, “young people who speak with their families about financial matters tend to have a higher level of financial literacy”. So, theoretically, more knowledge leads to better financial decisions.
Teaching Them The True Value of a Credit Card
Before they start using one, make sure your child understands that credit cards are more than just a way to make cashless purchases. You must also explain how credit works and how it can benefit their living situation in the long run.
Actually, most children aren’t even aware of what their credit report, credit history, or credit score are. Nor do they know about the consequences of poor spending habits. Here are a few starter details you can teach your child about credit cards:
By using their card, they’ll begin building a credit history and, soon after, a credit report will be created in their name by Canada’s main credit bureaus (Equifax and TransUnion). Although some credit card providers only report to one bureau, eventually both will have a slightly different copy of their report on file.
That report will contain most of their personal details, as well as a history of all their credit accounts, debts, and payment actions over the past few years. While certain details eventually disappear, others will remain long enough for lenders, landlords, and other third parties to inspect them.
They’ll also have a credit score that summarizes how they act as a credit user. Credit scores range from 300 – 900 and fluctuate according to their payment habits. The aforementioned third-parties will use it to judge their creditworthiness when they apply for things like new credit products, jobs, and apartment leases.
If they don’t carry too much debt and pay their monthly bills on time, their credit will gradually improve and make them eligible for those things, as well as good interest rates and payment plans. This is particularly important if they want to apply for a mortgage or vehicle loan someday.
However, if they have too much unpaid debt, they start missing payments, or only making minimum payments, their credit will slowly get worse, leading to lower approval chances, higher interest rates, and worse product conditions. Bad credit can even get them denied for an apartment or job (depending on the industry).
The more responsible they are with their credit card, the better their credit score will get and the easier things will be on them financially because they can save more money in interest, penalties, and fees.
Teens and Tweens
Age can play a major role in how easy it is for a child to understand financial responsibility and how to safely use credit. This is particularly true for teenagers, who can generally be broken down into two age groups:
Tweens (Ages 11 – 13)
The early days of high school are when many children want to start saving money and making trips to the mall. So, it’s a great time to help them open their first bank account and introduce them to their first debit card and/or prepaid credit card:
A debit card can be good for some tweens because they can only spend what’s in their account. If they run out of money, they must figure out how to earn more and avoid sending it frivolously. Plus, most banks offer free or low-cost accounts for children and students under a certain age.
A prepaid credit card can also be a safe and affordable option, especially if you don’t think your tween is ready for a debit card yet. Although the child can choose where to spend it, you get to decide how much money is on the card, without worrying about them accruing overdraft or other bank fees.
Debit cards & prepaid credit cards may not be right for your tween because:
Neither alternative will allow your tween to build a credit history. They can only use money that’s already in their account or on their card.
While there are free bank accounts for children under 18, they may still encounter some fees. For example, when they don’t maintain a specific balance.
Prepaid credit cards may also have certain costs involved, such as a withdrawal fee when the child uses their card at an ATM.
Debit cards & prepaid credit cards may be beneficial for your tween because:
By giving them a spending limit, you can teach your child that money doesn’t grow on trees. They must learn to work hard and save to replenish their funds.
You can also use that limit to teach your child what a credit limit is, how credit products work, and how taking on debt can affect their credit utilization ratio.
They’ll gain financial knowledge while avoiding high credit card interest rates, as well as the risk of damaging their credit due to overspending and debt.
Teens (Ages 14 – 17)
Despite the small gap between these two age groups, your teen’s spending habits may change significantly once they get their first job and become more independent. As such, their later teenage years are when it’s good to introduce them to credit cards:
Hopefully, your child will now have gained enough financial knowledge from debit or prepaid cards to start using their own basic credit card.
While they cannot apply for one alone, you can always let them borrow your card, cosign their application, or have their name added to your account.
A basic credit card may not be right for your teen because:
Credit cards make it very easy to rack up debt and penalties, especially if the child doesn’t understand their credit limit or the potential costs involved.
Some cards come with high-interest rates and yearly fees. More interest and fees can accumulate if your child doesn’t pay their full monthly balances.
If they miss payments, the account holder(s) will not only be penalized, their credit score and credit report will be damaged in the process.
A basic credit card may be beneficial to your teen because:
Using the card responsibly will help them build a healthy credit score. You can also use the opportunity to teach them about credit reports.
If they consistently make responsible payments, their credit score will increase. The same can be said about your score if the account is under your name.
They’ll learn how to avoid penalties, how pricey interest can be, and how much they must save to be able to buy what they want and still make full payments.
Graduating to Credit Cards
In Canada, your teenager must be past the age of majority in their province or territory to qualify for a credit card without the help of a parent or guardian:
Your child must be 18+ in …
Your child must be 19+ in …
Newfoundland & Labrador
Although they can be eligible for all the perks of a traditional credit card, two safer products you want to teach your child about are secured credit cards and student credit cards, each of which comes with various benefits:
Benefits of a Secured Credit Card:
To open a secured credit card, your teenager must put down a security deposit equal to their desired credit limit. Similar to a prepaid credit card, this would hopefully help them avoid spending too much and incurring overdraft penalties.
While they’re free to use the card until it expires, your child can also pay off their outstanding balance and cancel the account at any time. Once their full balance is paid, their deposit will be returned.
Benefits of a Student Credit Card:
If your child is in school and under a certain age, they may qualify for a special credit card with better conditions than a regular or secured card, such as a lower interest rate, no yearly fees, reward points, discounts, and other perks.
No matter what or where your teen is studying, student credit card approval requirements are more lenient than those of traditional or secured credit cards. No security deposit, existing credit history, or proof of income will be necessary.
How good credit can help them qualify for other credit products, better interest rates, apartments rentals, and other commodities
What Your Child Should Know Before Getting a Credit Card
If they’re of an appropriate age and you’ve taught them proper financial responsibility, your child shouldn’t have too much trouble qualifying for a credit card. However, there are a few important lessons they must learn before they apply, such as:
The consequences of paying late – The longer your child goes without paying their credit card bill, the more interest, penalties, and credit damage they will accumulate. Gradually, their creditworthiness will decrease, until they no longer qualify for favourable credit products, reasonable interest rates, or other benefits.
The consequences of minimum or partial payments – Not making full payments can also cause your child to accumulate interest and debt. Additionally, the more unpaid debt they carry, the more their credit score will suffer.
The consequences of overspending – Every dollar your child spends brings them closer to their credit limit and the drawbacks that come with maxing out their card. Afterward, all the interest and penalties they generate can seriously harm their credit and put them in debt for months, even years to come.
All the fees associated with credit cards – While some credit cards are free, others have high annual fees. If they don’t adopt responsible spending and payment habits, your child may be charged for other things, such as late payments, balance transfers, and going over their credit limit.
Protecting Your Child and Their Financial Future
Credit cards come with plenty of benefits that help your child in the long run. However, irresponsible spending can definitely do them more harm than good. So, it’s important to educate them early and make sure they have enough financial literacy to get through life while avoiding as much high-interest debt and credit damage as possible.
Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.
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