Educating Your Teens About Credit
As children grow into teens and young adults, they need to start learning about building good credit. Not having the proper guidance can lead young people down a path of building debt and poor money management. Starting at home with some principles for good financial management is a great way for parents to help their children grow into responsible adults.
Don’t start out with a credit card. The ease of using a credit card makes it far too easy to abuse. Instead, begin by teaching your children how to reconcile their bank statements with a debit card or checks. To help them when they first start out, link your bank account with theirs to avoid surcharges if they have difficulty with the lessons. Remind them to keep their receipts and always be mindful of spending only what they have available.
Have your children take responsibility for their car insurance or other bills that are directly related to their finances. Letting children have this experience of managing an amount while keeping in mind they have bills to pay is a great starting point for making good financial decisions.
Remind children about safety when using a debit card and have them practice watching their bank accounts for fraudulent charges. Encourage them to use an old fashioned record and write every purchase down so they understand the monetary power of a swipe. It’s much easier this day in age to get carried away with swiping a card for small charges that add up quickly. Their card usage should not be based on the “Accepted” notice after they complete a transaction.
Once you feel comfortable that your children are paying attention to their spending habits and remaining within their limits, it’s time to start building credit. Starting out early with good credit card habits can really give a child a step up when it comes to larger purchases later in life. Holding a credit card is more than an easy and secure way to pay for goods. It will build a credit score to protect your child’s future.
You may not feel comfortable letting your child start out with a debit card. The potential for fraud and overdraft charges is serious. It could also pose a problem if your child has access to a savings account that is intended for the future. Instead of letting him or her access a larger sum, obtain a prepaid card. The card will act as cash that is loaded in a predetermined amount by parents.
Many common credit card companies offer prepaid cards that include features like parental controls (to prevent your child from shopping certain locales), mobile features, and discounts for certain brands. You may encounter fees with the use of prepaid cards, which is a major drawback to using this form of payment. From activation fees to balance inquiry fees and maintenance fees, you might end up spending more than necessary on this form of card.
If your child is under the age of 18, he or she will not be able to apply for a card without parental approval. As a step toward credit independence, try a joint credit card that is cosigned by a parent. You can choose a low limit level to ensure your child doesn’t immediately start overspending.
Take time when the credit statement arrives each month to go over the activity and let your child know which purchases were valid and which were superfluous. At this point, a card should only be used for purchases that you and your child have agreed upon: emergencies, school-related activities, or buying something they have already saved money to obtain.
Authorized User Cards
Another option is to let your child have a card on your account as a secondary or tertiary cardholder. Sign them up for a parent’s card that the parent can benefit from, too. Make sure to carefully monitor statements for any purchases made on your account to prevent poor money management.
It’s easy for a child to think there are no consequences if he has access to a parent’s account with high limits. Set certain limits on what your child can purchase or how much he or she can spend per month to ensure the card is not abused. Go over your child’s spending with him every month.
Credit for 18 Year Olds
When a child heads off to college, having a credit card can help manage daily expenses in a secure way. Be a part of this first independent credit card venture, if possible. Helping your child learn how to avoid carrying a balance, as well as understanding how to prepare for times when carrying a balance is unavoidable is important. Having to learn these lessons without a parent’s guidance can be intimidating and difficult.
Hopefully the lessons of carrying other cards will pay off when your child opens his or her first independent credit account. Make sure you ask about your child’s credit card habits regularly. If you support your child financially through school, having these continuing conversations is easier and a good way to refresh your child’s memory about good money management.
Teaching your child a lesson can be difficult if your child has a hard time spending appropriately. While you don’t want to bail your child out from poor spending decisions, carrying a balance can lead to a financial obligation the parent must ultimately take responsibility for. Go back over a few steps of card management skills if your child mistakenly spends more than he can afford.
Overspending once or twice is understandable when a child starts learning about money management. Consider another payment method if your child has too much difficulty in remaining within appropriate spending limits. Letting spending go unchecked is a recipe for financial disaster. It can lead to your child having to carry a balance that can’t be paid off and that will weaken his or her credit score.
Don’t let a child off the hook for any surcharges or debt incurred, however. Being responsible for paying off debt before your child can use the money for anything else is a good way to let him or her know there are repercussions for poor spending decisions.