Teenagers know a lot of things adults don’t — from deftly using social media to finding perfect smartphone apps. But they’re still learning about money even as they’re spending it.
Understanding and managing credit is important for every teen’s financial future. As adults know too well, what’s in a credit report can influence everything from the mortgage rate you pay to your ability to secure a job.
These six steps will help convert your teens from credit novices to pros:
1. Talk to your teens about money
Talking about money is the first step to putting teens on the right path. The best advice from experts: Keep it simple.
Don’t overwhelm teens with too much information at first. Just stick to the basics, like the difference between using a credit card (which is borrowing money and paying interest on it) and using a debit card (which is withdrawing your own money, free of interest).
Before you have this discussion, make sure you know what you’re talking about. Start by reading:
2. Get a prepaid card
A prepaid debit card will give your teens some low-risk experience using plastic, because the maximum they can spend is what’s loaded on the card. This allows them to make purchases while learning to live within their means.
The downside? There may be fees to maintain the account. Prepaid cards also don’t report the user’s spending activity to credit bureaus, which means your teens won’t build a credit history using one.
3. Start a budget
Work with your teens to create a budget. It doesn’t need to be complicated — a simple budget that includes money they have coming in and what they’re spending 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.
Money Talks News partner YouNeedABudget can help with this process.
If you can instill the habit of tracking income and expenses, you’ve given your teens a skill that will serve them well for life.
4. Open a checking account
Many banks and credit unions offer what are called “minor” or “student” checking accounts, often with lower fees than standard accounts. By opening a basic account with checks, your teen will get accustomed to making deposits and reconciling an account. You can add a debit card tied to the account when you feel a teen is ready.
When you open a checking account for your teen, you have the option to either be a co-signer or let the teen go it alone. Co-signing will provide the opportunity to better monitor the account, but you’ll be responsible if your child overdraws 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 accounts to minors. Be sure to check with local credit unions as well. Many encourage young savers.
5. Move on to credit cards
Once teens prove their skills with checking accounts and debit cards, it’s time for credit cards, which will help them build a credit history. After passage of the Credit Card Accountability, Responsibility and Disclosure Act in 2009 (aka the CARD Act) those younger than 21 can’t get a credit card without either their own source of income or a co-signer.
So, if your teen doesn’t have a job, you’ll need to co-sign the application, which essentially is opening a joint account. Another possibility is to add the teen to your existing credit card as an authorized user.
When that credit starts accumulating, don’t forget this step: Show teens how to track their credit history by pulling a free report at annualcreditreport.com.
6. Set a good example
Kids learn from their parents. So, if you want your kids to be good financial stewards, be one yourself. Show kids how important it is to pay bills on time by doing it yourself.
And if you want your kids to piggyback on your credit by being an authorized user or co-signing 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 on which they’re authorized, you’re hurting their credit. Not a good way to start out in life.
What’s your approach to teaching kids about money? Share with us in the comments below or post to our Facebook page.
Jim Gold contributed to this report.