6 Steps to Giving Your Teen Credit

Giving your teen a credit card can help them become a financially responsible adult – or wreck their credit.

Teenagers know a lot of things adults don’t – from deftly using social media to finding the perfect smartphone apps. But they’re still learning about money even as they’re spending it.

Teens directly command $75 billion of discretionary spending, says Piper Jaffray, an investment banking firm that studies youth spending in fashion, beauty and personal care, digital media, food, gaming and entertainment. Largely as a result of the 2008 recession, teens have become budget-conscious value seekers, according to the banking firm.

However, a vast majority of teens, 84 percent, say they look to their parents for information about how to manage money, says a 2015 Junior Achievement survey. A TD Ameritrade survey of Gen Z (ages 15 to 24), found similar results, but also noted credit card debt increasing with age as young credit users failed to pay off balances each month.

The average debt for:

  • College-age Gen Z: $559
  • Post-college-age Gen Z: $975
  • Gen Y: $1,946

A Capital One survey in 2012 said that 1 in 4 teens didn’t know the difference between a debit card and credit card.

Understanding and managing credit is important because a stellar credit history is important. As adults know all too well, what’s in a credit report can influence everything from the ability to buy a house to getting a job.

These six steps will help convert your teen from credit novice to pro:

1. Talk to your teens about money

This is the first step to putting them on the right path, but many parents say it’s harder than the birds-and-bees conversation. The Junior Achievement study found nearly 9 in 10 (89 percent) parents say their children learn about money from them. Yet when asked about their philosophy for handling the family’s finances, more than 1 in 3 parents said they do not discuss money with their children and “let the kids be kids.”

The best advice from experts: Keep it simple. Don’t overwhelm your teen with too much information at first. Just stick to the basics, like the difference between a credit and debit card. Free guidance is available online. Consumer Action offers an online guide to talking about money; and MyCreditUnion.gov offers an interactive learning game. The California Department of Consumer Affairs offers the FDIC money management guide for youths. The Consumer Finance Protection Bureau also offers a free online “Money Smart” guide for parents to use when talking to their high school students.

2. Get a prepaid card

A prepaid debit card will give your teen low-risk experience using plastic, because the max they can spend is what’s loaded on the card. The downside? Fees to maintain the account. They also don’t report the user’s spending activity to credit bureaus, which means your teen doesn’t build a credit history.

3. Start a budget

Work with your teen to create a budget. It doesn’t need to be complicated, a simple budget that includes money they have coming in and expenses will do the trick. But make sure they track their expenses, including cash, and compare what they budget with what they actually spend every week or month.

If you can instill the habit of tracking income and expenses, you’ve given them a skill that will serve them well for life.

4. Open a checking account

Many banks and credit unions offer what’s called “minor” or “student” checking accounts that often have lower fees than standard accounts. By opening a basic account with checks, your teen will get accustomed to making deposits and reconciling their account. You can add a debit card tied to the account when you feel they’re ready.

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