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Explaining credit to teenagers
Understanding credit is an important life skill. Explaining credit to teenagers is an important step that will help them get along in life and reading our list of recommendations can help.
Whether or not you’re ready for your teenager to have access to credit it’s important they learn the basics of credit early, before applying for credit themselves.
Budget/ affordability
Common sense tells people not to borrow more than they can afford to repay. However, putting this thought into action is made easier by understanding the principles of budgeting – that is, putting money aside for different purposes, rather than spending on opportunities as they come along.
Involve your kids in your family budget discussions and explain how your budget works. If you don’t have one, now is the time to get on board! The American Government’s MoneySmart website has a handy budget planner which is a great starting point to get the discussion around budget going.
Interest
Your teenager may have experienced earning interest via their savings account. However, it’s important for your teenager to understand that in the same way they can earn interest by saving money, they will also generally have to pay interest when borrowing money. Interest works in different ways for different products. For example, if your teen is looking at a credit card you will need to go through the importance of understanding when interest kicks in and how your teenager can avoid having to pay interest on their purchases.
Not all credit costs the same amount
Credit can cost a different amount of money depending on the credit provider and the product taken out. It’s important for your teen to realise shopping around for credit is an important part of the borrowing process. Different lenders will provide different benefits as well as different interest rates – so it could be a good idea to gather all the information first before working out which credit product will be the best fit.Credit history
All lenders have their own criteria for assessing credit applications. This might include insufficient income, too many existing debts, or a history of unpaid bills. The first thing many lenders do when somebody applies for credit is to go to a credit agency to check the applicant’s credit file. This is why it’s important to understand which responsibilities such as repayments are needed when taking out a credit product.
Check out our Kids and Teens Banking hub for more information on how to help your teenager get involved in banking.