Talking finances with your teen

Talking finances with your teen

Not sure whether you should cave in to your teen’s clamouring for a credit card for personal expenses? Here are some of the pros and cons to help you make an informed decision.

Pros

Builds credit

Using a credit card wisely helps establish a strong credit track record and build up a good credit rating.

Encourages responsibility about money

Owning a credit card means paying off the monthly balance, so each purchase needs to be thought about carefully.

Teaches independence

Some things can only be bought on line or via apps. Owning their own credit card allows teenagers to buy things by themselves, without having to ask mom or dad for money.

Helps reassure mom and dad

The young intrepid is planning a trip and you’re getting a little nervous? A credit card could be really useful in certain circumstances, especially if combined with travel insurance!

Cons

Watch out for payment default!

Your teen will need your signature to obtain a credit card. As a co-signer, you will have to pay the outstanding balance if he doesn’t do his duty. Consider yourself warned.

And what about YOUR credit rating?

If cardholder junior doesn’t make the full credit card payments on time, it’s not only his own credit rating that will be harmed … it’s yours as well, since you’re the co-signer. A point worth remembering …

Careful of overspending

There’s nothing easier than shopping with a credit card but the price tag on the month’s little treats might come as a shock, and the bill not so easy to pay off.

Does money burn a hole in your little darling’s pocket?

A credit card doesn’t increase the amount of money we have to spend, it’s just a way of paying for stuff. Owning a credit card and using it properly requires discipline and maturity. Does your teenager fit this profile?

One thing’s for sure: it is essential to make a budget.

Solutions

Before going along with the request:

  • Ask him why he’s so keen to have a credit card: the reply should tell you everything about his motives, and will help you make your decision.
  • Make sure he has read the tips for credit card use.
  • Remind him that:
    • There are credit fees if the full balance is not paid off each month, as well as annual fees. These should be part of the budget.
    • 42% of Canadians do not pay the balance on their credit card each month. Guess who pays the interest charges!

Opt for a credit limit (about $500). Does your teen earn a decent income? Make sure the credit limit does not exceed half his monthly salary.

Ask the bank to be able to view the online card statement each month to check that the balance has returned to zero.

Your teenager is responsible, but you’re still not sure? Suggest a prepaid card. How he uses the card will give you a good idea of whether he’ll be able to manage his finances later on.

At 18, he’ll be entitled to his own credit card without needing you to co-sign, so it’s just as well to get started earlier and teach him financial responsibility.

Note: This blog post is provided for information purposes only. It is not a substitute for professional legal, financial or fiscal advice. For advice specific to your personal situation, always speak with your advisor. SSQ cannot be held responsible for any decision made as a result of reading this blog post.