When and how to introduce debit and credit cards, as well as the importance of creating a good credit score
With so many cashless payment options and online purchasing, today’s kids are exposed to bank cards and credit cards sooner than other generations. Without having cash in hand, teaching kids proper money management takes more than setting a piggy bank or opening a savings account.
Educating kids of all ages about debit and credit cards long before they have one is critical. Typically, the general consensus on the part of advisers is that those conversations can begin when they are around 10 years of age. Depending on the financial institution, children can get a debit card with a savings account around the age of 13 or 14. The maturity of the child determines whether they can handle the responsibilities of a credit card. Many advise waiting until the child is earning an income, typically around the age of 16, or until they reach the provincial age of majority and can apply for their own.
“Credit card debt is a rising problem in society and affecting a lot of young people,” says Dr. Supriya Syal, deputy commissioner of Research, Policy and Education, Financial Consumer Agency of Canada (FCAC). “Credit history can affect many things later in life, so it is essential that parents teach children about credit use and management.”
Here are some tips to help foster responsible cashless payment habits in kids.
Decide which payment option makes the most sense
Children, like everyone, are most likely to pay attention to things that are relevant to them. So, it is best to use age-appropriate strategies and examples. “For example, you can introduce basic money concepts to a pre-school child then, as they get older, teach them how to save for something they want like a toy or how to allocate their allowances to different jars, before teaching more advanced money management,” says Syal.
Debit cards are often the preferred option for kids learning to navigate cashless transactions. Because they are linked to a savings account, there is no risk they can get into debt. They still may need some guidelines however on what percentage of their savings they should be spending on personal items or entertainment, and how much should be kept in the account.
“I usually advise parents not to give kids a credit card,” says Leigh Sindlinger, CPA, CGA, and management consultant who also teaches CPA Canada financial literacy workshops to students from Grade 4 to 12. A Visa debit card works the same, but they can’t spend more than they have. When they have proven they can manage it successfully and are mature about their money management, you can then think about giving them a credit card.”
Because children cannot be issued a credit card in their own name until the age of majority for that province, parents can apply for supplementary cards for children of almost any age, under their supervision. They can however open a savings account that comes with a debit card with the permission of a parent or guardian.
“There’s not really a minimum age in Canada for a child to be added as an authorized user on a parent’s credit card,” says Syal. “Some banks specify age requirements while others will let teens of any age sign up as long as their parents take responsibility for their spending. Letting a child use a credit card requires diligent oversight to make sure they are not building bad credit habits.”
The ultimate question parents need to ask is a simple one, says Syal. “What will their child gain by having a credit card, do they have the ability to provide the kind of oversight that is needed or can they help their child learns those skills in other ways? If parents do decide to give children a card, it is vital to spend the time and effort to teach them about using credit wisely.”
If there is no benefit to be gained, debit cards are the way to go, stresses Sindlinger.
What kids don't know
A lot of pre-teens and teens want a credit card without understanding the implications around it, says Sindlinger. “It’s not just the fact they have to pay interest if they don’t pay their balance in full each month, but also that the interest is accrued over time. That’s a difficult concept for them to understand.”
Subscriptions (e.g., music and streaming services) can be another pitfall, she adds. “We talk a lot about that in workshops. Kids don’t realize how much subscriptions can add up and how that factors into their spending plan. If it’s on their card, they don’t even see it and when it comes time to pay, they may not have enough.”
Another talking point that needs to be stressed with kids is the importance of building a good credit score for when they reach adulthood, says Sindlinger. “If their credit score has taken a hit at a young age, it takes a long time to build their credit back up.”
How to keep them on the straight and narrow
There are a number of ways parents can protect their children from getting in over their heads.
Set limits and monitor their activity
“Setting up spending limits and monitoring their activity will help them learn how to build their credit rating in a controlled environment,” says Carolyn Goodwin, CPA, senior manager operations, financial literacy for CPA Canada. “You can also temporarily lock their card if they are going out with friends for the weekend, for example, and there’s a chance they could spend more than they should.”
If they have a debit card, setting it up as a joint savings account can help parents monitor their kids’ purchases. Set a reasonable limit on the card, so they don’t spend all their savings on frivolous purchases. Activity tracking apps are also a great way to monitor what is happening in your child’s account.
“There are several that help users monitor how much they spend on different items and provide monthly reports,” says Goodwin.
Encourage good payment habits
“Always pay off the balance in full every month,” says Sindlinger. “That’s a cardinal rule I teach students, and I repeat that sentence multiple times in my workshops. It’s also a good idea to encourage your child to set up automatic transfer payments to pay off their cards so they don’t forget.”
Change course if you need to
Even with the best intentions, it may turn out that your kids simply aren’t ready to handle the responsibility of a credit card. “If they find themselves in difficulty because they overspent, get rid of the card until they can get their finances under control,” says Sindlinger. “It’s a black hole they can get sucked into if they can’t stay on top of it.”
For more information about CPABC's financial literacy program, visit our FinLit page.
Denise Deveau is a Toronto-based freelance writer specializing in business and technology related topics.
Originally published by CPA Canada's news site.