Start the conversation about money with the important topic of debt, what it is, and how to avoid it.
We teach our children a lot of important life skills, like how to ride a bike, the rules of the road, behaving with manners, and navigating tricky social situations. Another important life lesson we can all agree on is the importance of building healthy financial habits.
There are some money lessons teens are not learning in school that are vital in the adult world. As teenagers grow older, their understanding of the good and bad that comes along with managing money will help them navigate adulthood better than those that learned at a later age. Let’s examine how you can talk to your teen about having and managing debt.
What is debt?
Start with defining debt. Debt occurs when you borrow money that you promise to pay back. The younger generation may not understand the relationship between debt and the plastic cards adult use to buy things. So as a parent or grandparent, it becomes your responsibility to teach and guide teens towards the correct understanding of debt and credit cards.
If your child is facing difficulty in understanding what debt is, try using examples they personally face. For instance, if you borrow money from a friend for a movie ticket or food, you pay them back. You paid the debt you owed to your friend. If you don’t pay them back when borrowing money, and continue to borrow money, then your debt to them grows which makes it harder to pay them back. Instead of using your own money to buy something new, you will need to use that money to pay back your friend.
Using a credit card
In 2021, adults ages 18 – 24 averaged $2,282 in credit card debt.1 Help your child avoid this statistic through teaching them the good and bad of credit cards.
Start with explaining the difference between a debit and a credit card. Then continue on to talk about how interest charges and fees work, and what it means to spend money you’re borrowing. Teach them about credit scores and how they affect their financial future.
Be sure to point out how easy it can be to overspend when using a credit card if you do not maintain a strict budget. It is important to not charge the credit card more than they can afford to pay off in full each month because that would result in interest charges and a buildup of debt.
Credit card companies offer credit cards specifically for high school students that serve as training wheels for the beginning of their credit journey. Once they are 18, credit card companies offer college student credit cards that are easy for students to open with no annual fees. Make sure your child understands the responsibilities associated with a credit card before advising them to open an account.
Let them know you are an available tool for them to use whenever they need guidance with their credit journey. Lead them by being their example to look up to.
Is your child planning to attend college? You and your child should discuss a plan for funding their higher education. In most cases, this plan will involve student loans.
Be aware that taking out student loans will affect your child in both the short term and long term of their financial future.
Each month, your child will have to pay a certain amount to the federal government or a private lender, depending on the type of loan and payment plan they choose. If you can help your child understand the toll student loan debt can take on their personal and financial lives, they may choose an alternative (or additional) payment method for college, such as academic scholarships or grant opportunities.2
Sit down with your teen and create a financial plan for how monthly loan payments could affect their future budget and how long they’ll likely need to pay off their student loans.
1. Do teenagers have credit scores?
You are not able to open a credit card until the age of 18.
2. Is it better to use a credit card to pay tuition than to use student loans?
Typically, using a credit card to cover the cost of higher education will result in paying more interest than you would by taking out a student loan. There are multiple options available for repaying federal student loans such as repayment plans linked to your income, interest-only repayment or deferment. These options are not available when you charge tuition to a credit card.3
- Experian.com, April 29, 2022. https://www.experian.com/blogs/ask-experian/research/consumer-debt-study/.
- Thebalance.com, November 2021. https://www.thebalance.com/how-to-talk-to-your-teen-about-debt-5202023#citation-1.
- Chase.com, 2022. https://www.chase.com/personal/credit-cards/education/basics/can-you-pay-for-college-with-credit-card.