Getting a first credit card is almost a rite of passage into adulthood. In fact, applying for an easy-to-get student credit card is often one of the first things teens do when they arrive at university and college campuses.
There’s no doubt that credit cards are everywhere. According to the Canadian Bankers Association (CBA), there are 71.3 million Visa and MasterCard cards in circulation in Canada, with the average Canadian holding two cards.
And while the majority of Canadians use their cards wisely — the CBA says 65% of us pay our credit-card balance in full each month — good credit card practices don’t necessarily come naturally.
Some financial experts suggest that parents help their kids get cards before starting at a post-secondary institution, a move that can help introduce responsible spending habits while still at arm’s reach. But ringing up the register can also ring up the risks when dealing with kids and credit cards.
Availability and age
Credit cards are available once someone reaches the age of majority in their Canadian province or territory, typically age 18, which makes new students prime targets.
Some financial institutions allow teens as young as 16 to access a card if a parent co-signs. Other banks make pre-loaded or prepaid credit cards — which ensure users don’t spend more than what’s on the card — available to kids as young as 13.
While credit card champions say these early-age cards allow parents to keep a close eye on their kids’ spending habits while introducing them to the practice of plastic (a co-signer has access to online accounts and statements), others say they’re just delaying kids from learning about debt until down the road, ignoring the concept of saving.
Benefits versus risks
The benefits to credit cards are pretty clear: instant and 24/7 access to funds; no collateral required against the amount charged; strong fraud protection over loss or theft; and young users can start building up their credit scores — which will help with larger purchases such as cars or homes in the future.
But the risks of accrued interest are real. Interest is charged daily after the 21-day grace period regulated under law. Any balance carried forward means you’re paying more than the sticker price. Credit card rates are 18% on average, and up to 30% on specialized cards offered by retail stores. And interest is immediate for any balance transfers (when you transfer the balance of one credit card to another) or cash advances.
Andrea Baxter knows this all too well. She is one of the five Vancouver women who started Smart Cookies, a money club inspired by an Oprah episode on personal finance. She realized at age 28, about 10 years after getting her first credit card, that she was carrying about $18,000 in debt.
“My story is a classic case of being a spoiled brat, in a way. With my parents, money was always handed out graciously. There was never a huge education or background about it,” she says. “They would say you should take this and save it, but there was never any enforced learning about it.”
Baxter got her first credit card when heading to university. The $500 limit was maxed within a few weeks. A stern phone call from her dad alerted her that shopping for clothes over books was not a wise move, but Baxter says, “My whole attitude towards money was never super-smart.”
“It was all about instant gratification and it just naturally progressed into later life. I always had a little bit of debt,” she says. “At first it was $1,000 here and $1,000 there. But by the time I was 28, I had real credit card problems.”
Baxter was able to get out of debt in about two years by “chipping away” at it and by “luckily” buying real estate early — she pulled equity out of her mortgage to clear her debt. But she wishes she had developed smarter spending habits earlier, especially when it came to credit.
If you want to set your teen on a clear and credit-friendly financial path into adulthood, here are some tips to consider:
- Make a budget — and stick to it. Baxter says the easiest way to help teens understand money is to “break it down into really simple terms.” Since they don’t typically have a lot of confusing expenses, the best course of action is a simple spreadsheet showing funds coming in and funds going out. This makes it less likely they’ll reach for the card. Baxter says the Smart Cookies call their budgets “spending plans” because the B-word “makes it sound like high-school math, which we hated.”
- To encourage savings, set a concrete goal. Baxter says incorporating “fun” into budgets — such as a trip planned for after graduation — will make a teen tune in. If they know exactly what’s needed for flights, travel and accommodation in Thailand, for example, they’ll be more likely to pass on late-night snacks or a new pair of jeans — and on the plastic.
- Remind your teen that more credit is not more money. Baxter’s number-one rule is to teach new spenders to live within their means. “I think their first impression is if they have a $5,000 credit limit, the money’s theirs,” she says. “But they don’t understand what interest is. Encourage them to ask themselves this simple question before laying down a card: If I had to pay cash for this purchase, would I still buy it?”
- Show young shoppers how interest rates add up. Numbers don’t lie. If your teen wants to buy a new $1,000 computer on credit, show him or her the risks involved. Using a card with 18% interest will take 10 years to pay off if only the minimum payment of 3% per month is made. Your teen will also ultimately be spending $1,798.89 on that computer as interest compounds over the decade.
- Build credit history earlier through other means, such as cell phone or car payments in your teen’s name.
- Compare which cards are right for your family using the online tools of the Financial Consumer Agency of Canada. For example, premium cards offer more bells and whistles such as travel incentives or reward points but typically charge an annual fee. If your teen is unlikely to collect enough points to cash in on the rewards, they may be better off with a standard no-fee credit card.
One of the best ways to prepare your teen for responsibly managing a credit card is to set a good example yourself and prove that you’re “walking the walk.” You can do this by actually showing your teen your credit card statements, and by involving him or her when you meet with your financial advisor.
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