Diana Clement: You can't give teenagers too much credit

Teenagers aren't right in the head, according to psychologist Nigel Latta. Hand them a credit card, as many banks like to, and they sometimes turn into the proverbial kid in a candy store.

A credit card, cellphone and driver's licence are the mark of adulthood for many teenagers. Yet there's a good chance they're not sufficiently mature to handle credit. The rational part of a young person's brain isn't fully developed until age 25 or so.

Giving them credit cards is like handing them a large supply of free beers or RTDs. Chances are they'll drink them and wake up with a bad hangover. The same can be said for credit consumption, except that the hangover from short binges can last for years.

We parents are often responsible for their behaviour. I read a book entitled Your Kids Are Your Own Fault. Teens who see their parents buying whatever they want and running a credit card balance will behave the same way.

Parents need to get involved in educating their offspring about credit, says Simon Brown, co-founder of Kohorts, a financial education app used in secondary schools.

Don't just hand over your credit card number to the children so they can pay for Spotify, he says.

Discuss with them the entire life cycle of borrowing and repayment. They may not realise, for example, that if they only make the minimum payment, the amount they owe grows.

One thing that makes it hard for developing teens is that the concept of "going into the red" is long gone. Their credit limit is often viewed as a spending limit or even free money and "emergencies" are no longer buying essential text books or fixing their car. There are, instead, everyday emergencies such as that nice shirt you just saw for sale in Zara or H&M.

If teens didn't learn about credit cards at school or home they may not even understand that the money they can spend needs to be paid back, says Tom Hartmann, of Sorted.org.nz.

Brown, a millennial, says everyone his age knows someone who borrowed at university with no understanding of the implications and ramifications if they didn't pay it back.

Another issue is social media. Combined with peer pressure it magnifies the problem of young people being unable to differentiate between needs and wants, Brown says.

First-time credit card users often buy more than they can afford, thinking they need, want or deserve the consumer goods their richer friends, colleagues or parents own.

TIPS FOR THE TEENS IN YOUR LIFE:

Credit cards aren't evil

They were designed to help with emergencies and can tide people over when they're caught short.

Choose a low interest card

The Co-operative Bank offers a card at 12.95 per cent interest with a $20 annual fee. ASB charges 13.50 per cent with no fee. Other high street banks were offering 13.45-13.90 per cent interest rates and annual fees from $50 to $65 this week.

Create a credit history

Use your card sparingly and pay it off every month to build a good credit history, which is handy when you want to get your first utility account, car loan, or even mortgage.

Be wary of credit card insurance

Unless you're employed full time (not self-employed or working part time) credit card insurance probably won't cover you and is wasted money.

Beware of cards handed out with HP

It can be confusing to know what you're paying off on the interest-free deals with the likes of Gem Visa, Q Card and Farmers Finance Card, through retailers. It's easy to miss repayments and end up paying interest you thought you'd escaped.

Think twice about raising your limit

My colleague Mary Holm received a letter from a parent whose teenager's bank pushed her to increase the original limit from $500 to $10,000, which she promptly spent. The smaller the limit the less you can spend unnecessarily.

Cash advances are expensive

Withdrawing cash from a machine on your credit card comes with hefty interest. It's not the same as using an Eftpos card.

Fortunately many millennials are smart enough to bypass credit completely and get a debit card. That way they can still pay online, but only use their own money.