Having to manage the finances of your children on top of your own can be wearisome, particularly if they aren’t living at home anymore. However, you can turn this into an opportunity to teach your children how to use a credit card wisely – an invaluable skill to have that will give them financial security later on in life.
Learning the financial basics from an early age will ensure that good money habits are ingrained in your children. If your children are already young adults, you can still teach them a great deal about financial wellness – and the sooner, the better.
Coach Your Children Financially
Naturally, debt management is one of the most essential skills to teach, as a great deal can be learnt through a credit card. Credit cards teach a valuable lesson on discipline, as they require your children to pay back what they borrow.
Credit cards also serve as learning curve on how interest and fees work, so your children quickly learn that borrowing comes at a price.
Let them take on small, manageable amounts of debt, just make sure they can afford to repay the debt they take on. Inform them that they will need to bring their ID, proof of income and pay slips to the bank to apply for a credit card.
Explain to your children how it works – i.e. the bank will assess their disposable income first and set them a credit limit based on what they can afford to repay. Tell them that their past repayment behaviours will be taken into account. The bank will check up on whether they paid on time and in full on other accounts, such as store cards.
Stress the fact that signing a contract makes it legally binding – they will have to repay what they borrow, paying the agreed upon instalment amounts at the agreed upon dates. Most importantly, they will need to demonstrate that they are earning enough to maintain credit card payments.
Ensure that your child appreciates the seriousness of failing to pay in their monthly minimum instalments at the specified dates. Explain how this will damage their credit score, hindering their access to credit in the future.
Advise your child to take out an amount that is well below what they can afford, as unforeseen expenses are a given in life – and they should always have spare cash in case of emergencies.
Remind them to shop with their heads and not their hearts, highlighting the importance of living within their means. Demonstrate the worst case scenario, if they were to start spending more than they make – damaged credit record, garnished salary or even repossessed assets.
Below are a few things your children should keep in mind, after taking out a credit card.
Build up a Healthy Credit Record
It is essential to begin getting your child familiar with positive financial habits to help them build up a good credit record. Explain to them that paying more than the minimum will stand them in good stead with the banks. Payments should be made in full and on time every month, as it takes just one slip up to put a dent in their credit score.
Moreover, make sure that the bills the bank sends them are in their own name. Also advise them to keep their proof of payments and to pull a free copy of their credit report yearly. This way, they can ensure that all of the information on their credit record is accurate.
Pay up Before Interest Piles up
Some credit cards come with an interest free repayment period. This means, if your child repays their credit card in full every month, they won’t incur any interest. However, beyond a certain period of time, interest will begin to accumulate on a daily basis.
So, advise your child to take advantage of this interest free period, by paying in as much as they can before their outstanding balance starts grow.
Prepare for Growing Financial Needs
As your children grow older, their financial needs grow. Make your children aware that banks offer different financial products to suit them at their various life stages, which may better address their changing financial needs.
As your child progresses in their career, their income will increase. At this point, it would be good for them to consider taking out a credit card that offers them benefits that they can now capitalise on, such as airport lounge access, if their job requires a lot of travelling.
Of course, once they have built up a good credit record, have a stable job and are earning a decent salary, your children will be able to take out debt that adds value to their lives – such as a home loan or vehicle finance. All because you coached them in their younger years on how to use credit cards to improve their financial future.