Welcome to this post on 6 things every teen should know about debt!
Debt is an important topic people of all ages should be aware of. But for teens, the stakes are higher since they still have their whole lives ahead of them and many will want to get into debt in order to buy things like cars or homes. Learning about how credit works can help your teen avoid getting into different troubles regarding debt. It’s not too late to start teaching your teenager about credit, but it is critical they learn as much as possible before they head out on their own.
The Importance of Teaching Teenagers About Debt
Image source: pexels.com
When it comes to managing your finances, teenagers are no different than adults. However, they are still developing their decision-making skills. If you don’t teach them the right things from an early age, they may never learn how to make smart decisions when it comes to money. In order to improve their mindset about finances, it’s also important to know why you’re teaching them about it. Here are three reasons:
1. You’re Setting the Stage for Future Success.
It’s one thing to tell someone what to do; it’s another thing entirely to actually show them. So if you want your child to succeed financially, you need to set the example. Your actions should reflect your values, so when you teach him about finances, show him why he needs to save, spend wisely, and avoid credit card debt.
2. You’re Helping Them Develop Financial Literacy Skills.
While your teen may not understand all the details surrounding his finances, he/she will certainly appreciate knowing that there are rules and regulations around borrowing money and spending money. Your child will also benefit from learning about personal finance basics such as budgeting and saving money. By teaching them these lessons at a young age, you give them a solid foundation that they can build upon as they grow up.
3. They’ll Learn How to Manage Their Finances Better Later on.
Teaching kids about personal finance at an early age gives them a better understanding of how it works. And it helps prepare them for life later on. As they begin to earn more money and manage their expenses, they will become more adept at handling money. Not only does this mean they will be able to handle their finances better now, but they will also feel confident when it comes time to apply for college loans or even jobs.
4. You’re Showing Them That Money Doesn’t Have to Be Complicated.
You may think that teaching your teen about money is complicated. But in reality, most teens already have some understanding of finance. After all, they’re surrounded by people who talk about it every day. So instead of trying to teach them something new, you just need to reinforce what they already know. You can start sharing simple stories with your child about other people’s financial struggles and successes.
There’s no need to get to the details and overwhelm your teen with information about finances. Instead, focus on providing guidance, setting examples, and reinforcing what they’ve learned. These steps will help your child develop the necessary skills to manage his/her finances successfully.
Topics to Cover When Teaching Teens About Debt
Image source: pexels.com
Now that we know why you’re teaching your teenager about debt, let’s take a closer look at topics that you should cover. Going through these important topics can build your child’s knowledge base while helping her/him gain confidence when dealing with finances down the road.
1. What Is Debt?
In the simplest terms, debt is money you owe someone. You might have credit card debt, auto loan debt, student loans, mortgage debt, and more. Remember to tell your teen that debt can even be as small as a dollar you borrowed from your friend. These arrangements are often made in order for people to purchase items or services.
For example, if I need some new furniture, I may ask my friends or family if I could borrow $500 to buy it. The amount of money I borrow depends on how much I want the item, and whether or not I will pay them back.
As long as you are making payments on your debts, you do not have any problems; however, if you stop paying them off, then you will begin accumulating interest charges along with late fees, which can add up very quickly.
2. Different Kinds of Debt
Debt comes in different forms, and it’s important for teens to know what each type means. Here are the most common kinds:
Secured Debt: This kind of debt involves collateral such as a car, house, or other valuable property. In return for this collateral, lenders agree to lower the initial cost of the asset by extending credit. Lenders require borrowers to make regular monthly payments, and they can repossess assets if borrowers fail to repay their debts.
Unsecured Debt: Unsecured debt includes student loans, medical bills, and other personal debts. Because there is nothing securing these debts, the lender has to put their full trust in the borrower to pay them back. This kind of debt is usually granted based on the borrower’s creditworthiness alone. If the borrower defaults on his or her loan, the lender may sue the borrower for repayment.
Revolving Credit: Revolving debt is a form of debt where the consumer borrows money from a bank or another lending institution on a recurring basis. The most common kind of recurring debt is a credit card with a credit limit. Lenders pay a varying amount per month, depending on the amount they spent within their credit limit.
Mortgage Debt: This type of debt refers to homeownership. To get approval for a mortgage, lenders will review your financial history and income. Consumers who own homes usually sign contracts agreeing to make regular payments to reduce the principal balance of the loan. Because mortgages are typically paid overtime, consumers must regularly make monthly payments to avoid defaulting on the loan.
3. “Good” Debt or “Bad” Debt?
Not all debt is considered bad. In fact, some debts actually help you build wealth. For example, if you take out a home mortgage to buy a house, this can be considered good debt. By putting down a deposit and meeting certain requirements, you will be able to purchase a property at a lower price than you would otherwise. When the mortgage is paid off, you have an asset that adds to your net worth. It also helps you establish a solid credit rating.
Additionally, the interest rate may be lower than the rate you could get by getting a personal loan. The key here is to understand which debts are worth keeping and which ones aren’t. Tell your teen that if a loan is taken out for a specific purpose, like buying a car or paying for school, it’s not necessarily a bad thing. As long as they use the money wisely and pay the debt back in time, they shouldn’t think of it negatively.
4. The Basics About Credit
Image source: unsplash.com
One of the most basic ways to manage debt is to control how much credit you use. One of the most basic ways to manage debt is to control how much credit you use. Credit is essential to modern life because it allows us to access many things we couldn’t afford without it. However, using too much credit can lead to serious consequences, including bankruptcy.
As such, teens must know the basics about credit and how credit can help them build a strong future. Here are some credit basics you should teach your teen:
- Credit History: A good credit history shows that you have stayed current with all your financial obligations. It also shows that you pay on time for what you borrow. If you don’t pay on time or consistently, this could be a red flag for lenders. Your credit history is usually reflected in your credit score, which is a number between 300-850.
Your credit score is based primarily on your payment history. For example, if you have never missed a payment on an account, and you have maintained low balances, then you will likely have a higher credit score than someone who has made several small payments but has failed to keep up with larger ones. - Importance of Good Credit Scores: When teaching teens about debt, always tell them that their credit score can affect different opportunities in life. It can affect their ability to get loans for college or car purchases; it may even affect whether they can get a job. The best thing your teen can do when learning about credit scores is to make sure he stays on top of his bills. This includes paying off any debts as soon as possible.
- How to Build a Strong Credit Score: As mentioned before, your credit score is based on your payment history. Teens must stay on top of their finances by making sure they always pay on time. Aim for a credit score of at least 700. You can check your credit score online or through one of the numerous websites that offer free credit reports.
- Credit Card Use: You should only use credit cards responsibly and pay them off completely every month so that you don’t accrue more debt. Many people think that using a credit card gives them greater freedom because they can spend as much as they want whenever they want.
However, credit cards are not like cash. They carry a high interest rate and charge fees for late payments and bounced checks. These added costs can cause you to accumulate even more debt than what you started out with.
5. Borrowing Money for College
Most teens who want to go to college don’t have the means to pay for it themselves. If your teen decides that they want to pursue higher education, you need to talk to him about borrowing money for school. Student loans are used throughout the country to fund higher education, and there are different kinds available depending on your state’s educational system. They are usually federally funded or privately funded.
- Federal student loans: These come from the U.S Department of Education and require borrowers to complete certain steps during application, such as filling out forms and submitting proof of income.
- Private student loans: This kind of loan comes from banks, credit unions, and other lending institutions. But since most teenagers haven’t established credit scores yet, a private lender will usually ask for a co-signer. This is someone with good credit history who can vouch for the borrower.
When borrowing money for college, make sure that your teen takes into account how much they’ll be paying in interest rates before deciding whether to borrow money or not. It’s also important to consider what kind of repayment plan you choose after graduation. There are many options available when it comes to student loan debt. In general, federal student loans should be paid in 10 years, while private loans vary greatly.
- Difference Between Simple and Compound Interest
Lastly, when talking to your teenager about debt, it’s important to explain the difference between simple and compound interest. Interest is simply the amount charged against an unpaid balance. If you don’t pay back a loan within the agreed-upon period, you will incur additional amounts owed in the form of interest.
There are two types of interest; simple interest and compound interest. When taking out loans, always try to opt for the former type rather than the latter. Simple interest computes interest on the principal portion of each monthly installment. Compound interest does this on the entire outstanding balance, making the amount due grow larger over time.
Tips When Teaching Teens About Debt
Image source: pexels.com
Being serious about teaching your child about debt and credit isn’t going to stop at just explaining the basics. Your teen needs practical advice when it comes to managing their personal finances. Here are some tips on helping your teen avoid financial pitfalls:
- Talk with them regularly about money matters, as well as how they can handle a problem if one arises.
- Help them learn good spending habits by having them set aside a certain amount of money each week for savings or other goals.
- Avoid talking about money negatively, but instead, focus on the positive aspects of being financially responsible.
- Encourage them to take advantage of different resources, such as books or videos online about finance.
The Takeaway
Teaching teenagers about debt can be challenging, especially because there are many aspects involved in the topic. But if you start early enough, you can help your teen develop sound financial skills. Talking about these topics regularly will make them aware of the importance of saving, planning ahead, and learning from mistakes. By providing your children with clear information about finances, you’re giving them the tools necessary to become successful adults.