Talking to teens about debt

4 tips for helping teens avoid the debt trap

As teenagers start making their own buying decisions they’re going to come across debt. So it’s important they understand how to manage it wisely and avoid making bad debt decisions. Here’s 4 easy lessons to help your teen get a better handle on it.

1. Building responsible borrowing habits

Parents are often their teen’s first lender, so it’s a great opportunity to impart the importance of repaying loans responsibly.

For instance, you could work together to create a structured repayment plan as well as a payment chart to help your teen visualise their progress. As each repayment is checked off, it can help foster a sense of accomplishment and responsibility.

Teen talk tip: Agree with your teen upfront how much they need to repay, how often before you lend them the amount.

2. Differentiating debit and credit cards

A fundamental money management skill is knowing the difference between debit and credit.

What’s in a word?

• Credit…is money you borrow and promise to pay back. It comes in many forms, including home loans, personal loans, credit cards and buy-now pay-later services.
• Debt…is money you owe. It can be manageable like a home loan you pay back regularly or become unmanageable like a credit card when you only make minimum repayments.

While debit cards can promote responsible spending because your teen can only spend the money in their linked a bank account, credit cards are a different matter. So it could pay to discuss debt, and the consequences of both responsible and irresponsible credit card use.

Teen talk tip: Sit down with your teen to explain how debit cards work using your own funds, and the pros and cons of using credit cards.

3. Understanding the pros and cons of debt

It’s never too early for teens to get an understanding of debt and its implications.

For instance, some forms of debt – such as a student loan for higher education – can help contribute to future growth and opportunities. While debt that results in high-interest repayments, such as using a credit card for non-essential purchases, can be very costly.

Teen talk tip: Ask your teen to evaluate whether going into debt to make a purchase they want will help or hinder them long term.

4. Managing buy now, pay later services

With the rapid rise of buy now, pay later – BNPL for short – services with popular retailers, it’s important your teen has a good understanding of this popular trend payment option.

Sure, BNPL services can make it easier to afford items without an immediate financial burden. However, relying on BNPL without careful thought and budgeting can lead to overspending, losing track of repayments and lots of fees.

Teen talk tip: Talk to your teen about the pros and cons of BNPL services, and remind them to always check the fine print – ‘free’ doesn’t always mean totally free!