Teaching teens about credit

From: Financial Consumer Agency of Canada

Teach teens how to use credit wisely

Teach your teens how to manage money before they get a credit card. This may help them avoid future problems with credit cards.

Start teaching children how to manage money at an early age. It will help prepare them to make good financial decisions and avoid debt problems when using credit later on in life.

Show your teens how you use credit wisely, for example, by paying your bill in full each month. If you had credit card debt in the past, make sure your teens understand what happened and how hard it was to pay it down.

If your teens see you using credit wisely, they may be more likely to follow your example.

Credit concepts to teach teens

Before your teens apply for any type of credit, including credit cards, make sure they understand how to use it.

Some types of credit may help your teens improve their financial situation over the long term if they use it responsibly. For example, a student loan for their education may help them get a better job and improve their income. Credit can also cause big problems if your teens don’t use it carefully. For example, they could find themselves with more debt than they can pay off.

Credit does not mean extra income

Make sure your teens understand that credit doesn’t give them more money to spend. In fact, when they have to make credit card or loan payments, they’ll have less money. Help your teens learn the importance of not spending more money than they have.

Before using credit, teens need to make sure the payment will fit into their budget.

Paying off the entire amount every month

Encourage your teens to pay off the entire balance of their credit card every month. If they pay the full amount every month, they won’t need to pay interest.

If they can’t pay the full amount, it’s a warning sign that they may be spending more than they can afford.

Encourage your teens to set savings goals. This way they’ll have the money to pay for purchases made on credit.

Paying just the minimum payment will cost more in interest

Make sure your teens know that making only the minimum payment will cost more over time. The longer they take to pay what they owe, the more they’ll pay in interest.

To show your teen how long it would take them to pay off their credit card if they don’t pay the full amount each month, use the Credit Card Payment Calculator.

Before adding your teen as an additional cardholder

Most financial institutions won't approve teens for a credit card because they're not old enough to get their own. This is why your teen might ask you to add them as an additional cardholder to your card.

Before you agree to add your teen as an additional cardholder, make sure you:

know that you will be held responsible for any outstanding balances
understand that any late payments your teen makes will be reported on your credit history
read the credit card agreement carefully

Learn more about additional cardholders and authorized users.

When teens can get their own credit card

Teens must be the legal age of majority in their province before they can get their own credit card.

The age of majority is 18 years old in:

Alberta
Manitoba
Ontario
Prince Edward Island
Quebec
Saskatchewan

The age of majority is 19 years old in:

British Columbia
New Brunswick
Newfoundland and Labrador
Northwest Territories
Nova Scotia
Nunavut
Yukon

Keep the credit limit low

Consider keeping the credit limit to a low amount that your teen can pay off comfortably. He or she could start out by making a few small purchases each month on the credit card. For example, your teen could use it to pay for gas, haircuts or small meals. These small purchases may be easier to pay off compared to more expensive purchases.

Review monthly statements

Review each monthly statement online with your teen and discuss the purchases and any interest charges. If your teen has to pay interest, make sure it’s clear that he or she is paying more for each purchase because of the interest. Work together to make a budget for paying off any interest on the credit card.

Building a good credit history is important

Talk to your teens about how their credit history and credit score could affect their financial future. Lenders, employers and landlords may look at your teens’ credit history before deciding to lend, hire or rent to them.

Unpaid credit card bills will damage your teens’ credit score.

This may make it harder for them to:

get a loan
get a job
rent an apartment

How credit reports and scores work

Talk to your teens about the importance of credit reports and scores. Explain that companies called credit bureaus track your teens’ payment history. They supply this information to banks and other financial institutions that issue credit cards and loans.

Explain to your teens that their credit history is used to calculate a credit score. Lenders use credit scores to decide if they’ll lend money to someone and the interest rate they’ll charge on loans.

Helping your teens build credit responsibly

It can be difficult for teens to build a credit history since they usually don’t take out personal loans and may not have a credit card yet. Using credit responsibly and making credit card payments on time can help your teens build a good credit history.

There are a number of ways you may help your teens build their credit history. Here are some options you may consider.

Build credit using a secured credit card

Secured cards can help your teen to build a credit history. These cards work much like traditional credit cards but the credit limit is based on the amount of the security deposit.

Banks and other financial institutions issuing these cards will report payments to the credit bureaus. Once his or her credit score rises high enough, your teen may be able apply for a traditional unsecured credit card without asking you to co-sign the application.

Discover how secured credit cards work.

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