Introducing your child to credit helps to ensure they form healthy habits and use finance responsibly. Our helpful guide lists some great starting points.
Understanding the difference between saving and spending
Before introducing your child to credit, it’s vital that they have a solid understanding of the differences between saving and spending their money. Setting up practical steps will help them save money each month towards long-term expenses or their goals or aspirations.
Spending is where you commit to purchasing your needs or wants – and balancing the two successfully is key to keeping a healthy budget.
Credit is a powerful tool that can be used to access opportunities that come your way when you don’t immediately have the funds to settle the expense in one go. Credit, however, involves repayments with interest – and for this reason, having a healthy understanding of how you can best manage your finances is beneficial to borrowing responsibly.
Remind me – what are the different forms of credit?
Credit is available in many different varieties and forms – for example, credit can either be unsecured (with a higher interest rate, but with no collateral or security required) or secured (where a borrower can apply for a lower interest rate at the expense of placing an asset as security in the event they can’t service their loan repayments).
Explaining the many different forms of credit to your child – such as the difference between short-term loans, credit cards, store credit, and more can help them select a loan that’s right for them.
The Money Academy has useful explainers to help guide your child’s journey into credit, and can help them form healthy borrowing habits:
Introduce and apply with a registered credit provider
Across the world and in South Africa, there are both unlicensed and licensed credit providers. In the former case, unregulated lenders (which can include friends, family, or mashonisas) operate outside of the law. On the one hand, a friend might offer your child a loan without the expectation of interest paid on their account; on the other, a mashonisa may require high interest rates or collateral (a security) offered to secure the loan.
Both informal lending options come with no security and no guarantee for either the lender or borrower in question and can cause significant financial stress if not managed properly. For this reason, it is better to introduce your child to a regulated lender and explain the benefits of applying with a lender under the auspices of the National Credit Act (NCA).
NCA-compliant lenders recognized by their license and registration with the National Credit Regulator (NCR) are bound to comply with many laws and regulations that protect both parties. These include offering specific loan amounts and terms, and the requirement that lenders evaluate a borrower’s income to ensure that they will be able to repay the loan they intend to apply for.
Registered lenders will also practice regulated collections practices and will collect your repayment or instalments on time with agreed interest and fees payable. In the event something goes awry, both parties are protected by law and borrowers can seek out debt counselling in the event that they enter into financial hardship and they cannot service their loan.
Avoid co-signing loans
When your child comes of age and is ready to take out a loan of their own, it can be tempting to co-sign a loan to either share responsibility with them or manage access to credit in the event you wish to purchase or finance an asset together.
While these are ideas with good intentions, it can be beneficial to instead allow your child to sign for the loan themselves. Becoming a co-signatory can mean that your credit score would be impacted if your child doesn’t manage their loan responsibly - placing both of you in financial jeopardy and limiting your ability to assist one another.
While allowing your child to manage their debt on their own might seem intimidating, it is a far less complicated method of enabling them to take ownership of their accounts and comes with fewer risks attached.
Help your child form a repayment plan
Instead of co-signing a loan with your child, a more practical way of guiding them in making their repayments and honouring their loans can include forming a repayment plan. A repayment plan is where you organise your finances and monthly budget to settle your debts.
Teaching your child how to budget for regular loan repayments, understanding how debt and interest can accrue, and avoiding penalty fees can assist them in forming healthy financial habits that will prove beneficial far into the future.
If you’d like to get started, our Financial Readiness Pack can help you and your child get a head start with many great tools designed to help with not only loan repayments, but further budgeting and even fraud awareness.
Help your child apply for a student or graduate card
If your child is of age and is either in a secondary or tertiary learning institution, they may be eligible for a student or graduate banking account which can include a credit card facility.
Applying for and using this facility can be a useful way to introduce your child to credit, and your bank may even offer you oversight of this account. Using this feature can help your child access opportunities and make repayments responsibly. Practical examples of helping your child use this feature could include subscribing to a music streaming service through their credit facility, and then creating a monthly stop order from their debit account to settle this expense on time.
Doing these practical exercises can help your child build a good credit history, and set them up for success far into the future.