How to teach your child to manage a credit card
Making every day financial transactions on behalf of your child can be tedious, especially when they are living away from home.
Chris Labuschagne, CEO, FNB Credit Card, says that parents can use the opportunity to educate their children about managing their credit – a lesson that will benefit him/her both now and in the future.
“Basic financial learning curves are best learnt early in life and it is therefore ideal to use your children’s 20s as the training ground for their financial wellness in future. Managing debt is one such important learning curve and a credit card is a transactional tool through which this experience can be gained,” Labuschagne said.
FNB said that the sooner they can be taught to be disciplined in handling their credit card, such as paying back debt and controlling the associated interest and fees, the better.
This can be taught by initially taking on small and manageable forms of debt, and never allowing them to take on more than they can afford to pay off.
Your child will have to be 18 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.
“Something worth highlighting to your child is 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,” Labuschagne said.
“This should not be taken lightly because failing to meet the monthly minimum repayment by the due date, will impact your child’s credit score and could consequently hamper approval of credit applications in future.”
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, the bank said.
Once your child has their credit card, make sure that they become familiar with the following:
Building a healthy credit score
It is important to start educating your child to be familiar with financial behaviour that will build a positive credit record. Ideally they should ensure that a credit card payment is made in full every month or exceeds the monthly minimum repayment.
They must also ensure that bills they receive from the bank are in their name. In addition to keeping proof of payments, they must check their credit records at all credit bureaus to ensure that their information is correct. It’s worth reminding them that they are 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 functionality 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.
Catering for growing financial needs
Life is not stagnant, it therefore makes sense that as an individual grows that his or her finances align to their growth. Meaning banks and their product offerings should be able to address the needs of their clients as they change.
As your child’s career takes off and advances with an income increase, they might want to start considering a credit card account that offers airport lounge access for their travels, 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.
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