Credit Worthy?—Teaching Teens About Spending and Spending Limits

By Rachelle Stoller
May 2015 View more Finance

According to the Federal Reserve’s latest statistics, credit card debt accounts for the third largest portion of household debt among adults, behind mortgages and student loans, respectively. With more than 75 percent of teens shopping online today, the next generation is poised to be in the same position as their parents financially, if not worse.

But, you can do something to help your kids learn about money and avoid the credit trap.

Start Young

Often parents won’t talk to their kids about money because they don’t have a full understanding of their own financial situation or it embarrasses them. Teaching children how to use money as a tool is one of the most important lessons to ensure their future success and independence.

While you don’t have to share everything right away, you can start with the basics as early as age five, says Edward Jones Financial Advisor, David Erickson. “Help them understand how much money they have to spend versus how much something they want costs and let them start to make choices.”
As kids get to the age of 10 or 11, you can get into more in-depth discussions, such as what debt is and why you may not want to pay for something right away. The tween years are when Erickson recommends starting to talk about interest and how to make it work for you. This paves the way for responsible credit card usage.

Explain the Limits of Credit

Credit cards hold a natural mystique for teens. Not only are they convenient and easy to carry, credit cards allow teens to believe they have more money to spend than they actually do. “Credit cards give kids no connection to money and no concept of how much things truly cost,” Erickson points out. “If a teenager has money in his wallet, he knows when he’s spent all of it. A credit card can seem like endless money and cause that teen to spend more.”

Teach Responsibility Slowly

Completely disallowing credit cards isn’t realistic. But teaching your kids how to use them by following a progressive model suggested by credit card comparison website, CreditDonkey® (creditmonkey.com) can arm your teen with the knowledge and experience they will need to use credit cards responsibly:

Step 1: Have your teen use cash for purchases to understand what things cost.

Step 2: Prepaid debit cards are a great way to teach spending limits with the experience of using a credit card.

Step 3: ATM/Debit cards require kids to track their money and experience the consequence of spending too much.

Step 4: Co-sign your teen’s credit card and review bills monthly to teach them about minimum payments and rolling interest.

Step 5: Once you’ve graduated to secured/unsecured credit cards, your teen should understand how to use them responsibly.

Reinforce Accountability

Look for ways to teach accountability. Take the school lunch system, for example. Instead of blindly adding funds to your child’s account whenever they are depleted, either send cash or review with your child how much they spent on lunches and extra snacks. Help them understand the connection between the amount you calculate for their lunches and how much they’re spending.

Another method Erickson suggests is to have kids work for their money. Determine a set of chores or activities that are separate from those associated with allowance and offer them to your child when she asks for money. Not only will it make you feel better about giving her that $20, it will also allow your child to experience the feeling of spending the money she just worked for and may make a difference in how she spends it.