Giving your teen a credit card can help them become a financially responsible adult – or wreck their credit. Here's how to make sure they're on the right path.
Teenagers know a lot of things adults don’t – from deftly using social media to finding the perfect smartphone apps. But they apparently don’t know much about money.
ING Direct and Capital One recently surveyed teens ages 12 to 17 on their financial knowledge. Only 17 percent claimed to know a lot about money. When asked what they want to learn most about money, only 28 percent said they’d like to learn how to budget. And here’s a scary stat: One in four teenagers 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.
If you’ve wondered how to provide a credit education for your teens with real-life experience, check out the following video. Money Talks News founder Stacy Johnson has some tips – check them out, then read on for step-by-step instructions…
Here are six steps to 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 ING Direct and Capital One survey found that while 35 percent of parents are prepared to talk to their teens about drugs and alcohol, only 26 percent are ready to talk about money. 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.
2. Get a prepaid card
A prepaid debit card will give your teen low-risk experience using plastic, since 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 implant 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 a checkbook. You can add a debit card tied to the account when you feel they’re ready.
When you open a checking account for your teen, you have the option to either sign on as a cosigner or let them go it alone. Cosigning will provide the opportunity to better monitor the account – but you’ll be responsible for any fees if your child overdraws it and can’t pay the fees that result. Ask if your bank offers overdraft protection through a linked savings account or credit card.
Not all banks offer minor accounts, but here are a few that do. Be sure to check with local credit unions as well – many encourage young savers.
- Wells Fargo Teen Checking
- Chase High School Checking
- KeyBank Key Student Checking (only available to 16 and up)
5. Move on to credit cards
Once your teen has proven their skills with a checking account and debit card, it’s time for a credit card – which will help your teen build credit. Due to the Credit Card Accountability, Responsibility and Disclosure Act of 2009, aka the CARD Act, those under 21 can’t get a credit card on their own without either a source of income or a cosigner. So if your teen doesn’t have a job, you’ll need to cosign their application, which essentially is opening a joint account. Another possibility is to add your teen onto your existing credit card as an authorized user.
Keep in mind that with a joint credit account, both you and your teen are responsible for the bill. If you add them as an authorized user on your card, you’re fully responsible for the bill. Both methods can help your teen establish a credit history, but because they’re personally liable, a joint account carries more weight with lenders and will better help them qualify for their own credit.
If you want your teen to have their own plastic but are worried they may mess up their credit or yours, you could open a joint secured card. With a secured credit card, the available credit on the card is limited by the amount of security deposit you put down.
Like the secured debit card, it’ll prevent overspending – and often carry higher fees than traditional cards. But secured credit cards still help build credit. For tips on opening a secured credit card with a decent rate, check out Up-Front Credit Card Fees? Here’s a Better Option.
6. Set a good example
If you want your kids to stay off drugs, you probably don’t smoke pot in front of them. The same logic applies here. Kids learn from their parents, so if you want your kids to be good financial stewards, be one yourself. Stress the importance of a good credit history by having one. Show them how important it is to pay bills on time by doing it.
And if you want your kids to piggyback on your credit by being an authorized user or cosigning for a credit card, remember it’s a double-edged sword. Your good credit can help your offspring establish their own, but if you miss payments on the card you hold jointly or they’re authorized on, you’re hurting their credit. Not a good way to start out in life.