As a parent, raising teenagers brings a whole new set of conversations. And money is one of the most important ones to have.
According to the Sydney Morning Herald, over 850,000 young people between the ages of 15 and 19 are currently employed in Australia. This means many are making financial choices earlier than many parents would have expected.
As they are earning their own money, it is only natural that they want to buy things for themselves. However, being young and maybe a little naive, it’s fair to say that they might not all do this in a responsible way.
That is why it is important to teach your teens about how loans and credit work. Doing so will give them the confidence to make savvier decisions both now and in the future. The good news is that you don’t need to be a finance expert to guide them. You just need to give them clear, simple explanations and to lead by example.
This article highlights some easy ways to help you do that.
Why Teens Need Financial Literacy
Money is often a topic that parents don’t discuss with their children until they start their first “proper” full-time job. Sometimes this can be when they are in their early 20s. However, this can represent a missed opportunity.
There is nothing to stop a 15-year-old with a part-time job from making decisions about investing money. Likewise, an 18-year-old with a credit card or propensity to purchase products on a “Buy Now, Pay Later” basis can open themselves up to the potential for debt. For this reason, it’s never too early to teach your child about financial literacy.
Doing this helps them understand how money flows in and out of their accounts. It shows them how to make choices that better support their long-term goals. For instance, a teen who knows how loans work is less likely to take on something they can’t manage. Likewise, one who understands credit should have an easier time with future milestones, such as obtaining a car loan, renting their first place, or applying for a mobile plan.
Why It Is Important To Teach Teens About Credit
Credit is something many teens get excited about. The opportunity to have several thousand dollars advanced to them by lending institutions is undoubtedly very tempting.
However, many teens often hear the term credit but don’t fully understand what it means to pay it back. Or the implications of not doing so. For this reason, it is important to provide them with a clear explanation that helps them understand how credit influences their adult life.
A good way to start this is by breaking down the concept of a credit score to them. Consider telling them it’s like a school report card that shows how responsible someone has been with money. Also, impress upon them that when a person pays bills on time and keeps debt low, their credit score stays healthy. Conversely, when they miss payments, it drops.
It is also a good idea to explain the link between credit and future choices. For example, having an excellent credit score makes it easier to obtain car loans and helps secure a mortgage.
Helping Teens Understand Loans in Simple Terms
Many teens hear the word “loan” and think it only applies to car payments or mortgages. However, you can teach them that a loan is any situation where a person borrows money with the intention of repaying it. This includes smaller things, such as owing a friend money or receiving an advance from an employer. If you can get them to understand this early, that is half the battle won.
This is also a prime opportunity to explain the concept of understanding interest rates. But try to keep it simple by giving an example like: “If you borrow $100 and the interest adds up to $10, you repay $110.” They should find these short explanations a lot more relatable.
Increasingly, many teens are dealing with microloans, simply by utilising buy-now-pay-later services. While teens may view them as harmless, they should be made aware that missed payments can accumulate and potentially have consequences.
Whilst on the subject, you can also talk about student loans, car loans, or holiday loans. These are big decisions they will face one day. Knowing how they work from an early age will help them avoid falling into debt traps.
Good Credit Habits Every Teen Should Learn
Perhaps the best way to teach your teens about loans and credit is to instil some good habits into them as soon as they start earning money.
For instance, encourage them to put away a portion of any money they earn. A good rule of thumb is to allocate 10-20% of their total wage, which is automatically transferred electronically to a savings account on the day they receive their payment.
Other healthy financial habits you can teach them are:
- Paying bills on time
- Keeping their spending habits simple
- Avoiding unnecessary borrowing
- Checking statements or balances regularly
- How to save for a house
It is also a great idea to teach them about what will happen if their credit score drops. Highlighting the paths they may need to take if their score isn’t optimal will encourage them to make smart financial decisions. A brilliant example would be looking into bad credit personal loans from EBP Money and understanding the terms of these loans in comparison to other loan providers and types.
Having a holistic view that depends on credit score and loan type will help guide your teens to making the right decision for their financial future later down the track.
Tools and Resources to Build Money Management Skills
Many tools help teens explore money safely. Budgeting apps, money worksheets, or savings trackers are all great options. Even a simple notebook can work well. Often, teens learn best when they write things down themselves.You can also use videos and online calculators that explain how credit works for beginners. These tools give teens visual examples that they tend to respond to well. If they see their money grow or shrink, it will help them make much better spending, saving and investment choices.
