Basic financial learning curves are best learnt early in life, they will benefit you in your youth as well as in the future. Managing debt is one such important learning curve and a credit card is a transactional tool through which this experience can be gained. The sooner you teach your children to be disciplined in handling a credit card, such as paying back debt and controlling the associated interest and fees, the better.
This can be taught by allowing your children to take on small and manageable forms of debt, while never permitting them to take on more than they can afford to pay off.
Your child will have to be 18 years old and needs to provide proof of income in order to apply for a credit card. The bank will conduct a disposable income assessment on the applicant’s financial profile and credit will be made available in line with what they should be able to repay.
Past credit usage, including adherence to the repayment terms is also taken into account during this process if this info is available.
You should make it clear to your child that the contract they sign is a legal document that will also include an agreement to make repayments by certain dates. One of the most important things when deciding to apply for a credit card is to ensure the capability of making the repayments and failing to meet the monthly minimum repayment by the due date, will impact their credit score and consequently impede approval of future credit applications.
Once your child has their credit card, make sure that they become familiar with the following:
Building a credit score
Ideally, credit card payments should be made in full every month or exceed the monthly minimum repayment. It is important to start educating your child to be familiar with financial behaviour that will build a positive credit record.
In addition to keeping proof of payments, they must check their credit records at all credit bureaus to ensure that their information is correct. They must also ensure that bills they receive from the bank are in their name. It’s worth reminding that you’re entitled to one free credit report per year.
Interest free repayment period
Most banks offer an interest free repayment period of about 55 days on credit cards. This allows account holders to pay their accounts in full on a monthly basis, so that they do not have to incur interest. Beyond that period interest on a credit card accumulates on the daily outstanding balance on the account.
Growing financial needs
You are constantly changing and growing and your finances need to align with this growth. As careers take off and incomes increase, you might want to start considering a credit card account that offers airport lounge access, rewards and other travel benefits, or even one with value-adds that are unavailable on an entry level bank account. Other accounts they may need include a home or car loan, savings and sound investment accounts.
Be safe and advise your child to set limits even lower than what they can afford. It is also important to avoid emotional shopping and living above their means as this is key to managing credit effectively.