The art of lending your teen money

Adèle Manseau | Desjardins Group

For your teen, there are many steps on the road to independence. One of the biggest milestones is when they start taking responsibility for paying for the things they want.

When they're young, your child isn't concerned with making ends meet. As long as they've got a roof over their head and food to eat, they're happy. They don't think about the fact that their basic needs are being met.

A few years later, they become aware of new things, and they'll want to buy some of those things, whether or not they actually need them. Everything looks so appealing! They're no longer young enough to get everything they want for free, but they're still too young to be financially independent. That means they should start learning to save in order to pay for the things they want.

As they become teenagers, you can introduce the concept of responsible credit management with “parent credit.” It can prove beneficial as they take their first steps into the world of credit. By learning the basic principles, they'll be better prepared to manage it wisely as adults. At the same time, they'll also be learning what helps build a credit history, which will serve them well later on.

1. Parent credit
“I want a moped so I can get around by myself, and not have to keep asking you to drop me off everywhere.” “I'm the only one of my friends who doesn't have a cellphone, I feel like I'm behind the times.” Many parents hear these kinds of comments. Since your teen is too young to get regular credit, you decide to help them out.

You're the lender. You play the role of financial institution by giving them a loan, and rules apply. Discuss their need and determine if you're financing the entire amount or if they have to chip in as well. Also talk about whether or not they can afford it. Then you'll need to agree on the repayment amount, repayment terms and deadline.

Adding a symbolic interest rate on the loan or on late payments is a good idea, since it shows your teen that credit isn't free and they should use it wisely. When they see that the cost of credit exceeds the cost of the purchase, they'll realize the importance of having the funds needed to buy it outright rather than use credit.

That's home credit 101.

2. Paying it back
Your teen has found a way to pay for what they want and they're satisfied. They're happily riding around town on their moped or using their new cellphone to keep in touch with all their friends.

Life is good, but they need to be responsible. Credit comes with conditions for paying you back, and your teen is committed to meeting those repayment conditions.

You're the parent. This is a good opportunity to educate your teen on the importance of respecting the repayment schedule they agreed to so they can avoid interest. This approach will help them understand what being a good “payor” means for their credit file.

The same applies in the case of reimbursing you for charges on the cellphone you bought for them. If they don't pay you back on time, they develop poor habits that could hurt them later on.

That's financial responsibility 101.

3. Credit file
Your teen's credit file keeps a record of every time they borrow money. Starting with their first loan, their file will indicate if they're paying off their debts on time, if they're making late payments, how much they've borrowed, and more.

The information it contains determines their solvency—their ability to pay off their debts by tracing their credit history. Financial institutions will take all that information into account before extending credit.

So it's important that they start managing their credit wisely now, which will help them maintain a good reputation with financial institutions down the road.

To learn more, see The pros and cons of credit.