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 in the U.S. spend close to $260 billion annually on fashion, beauty and personal care, digital media, food, gaming and entertainment.
As it turns out, teens still prefer cash, according to the 2017 Teens & Personal Finance Survey by Junior Achievement. In fact, more than 3 in 5 teens prefer to make purchases with cash, while fewer than 1 in 3 teens use a credit or debit card. And despite this age group’s relative digital savvy, far fewer (only 4 percent of teens) use an electronic form of payment such as Apple Pay or Google Wallet.
Cash may be king among teenagers, but understanding and managing credit is still important for their futures. 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 teens from credit novices to pros:
1. Talk to your teens about money
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Talking about money is the first step to putting teens on the right path, but many parents say it’s harder than the birds-and-bees conversation.
The best advice from experts: Keep it simple. Don’t overwhelm your 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). If you need some guidance to help you help them, check out these free online resources:
- “Teens and Money: Talking to Teens About Money” from the nonprofit Consumer Action in partnership with Capital One Services
- “Start Smart: Money Management for Teens” from the California Department of Consumer Affairs
- “Money Smart” parent/caregiver guide for grades 9-12 from the FDIC
2. Get a prepaid card
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A prepaid debit card will give your teens low-risk experience using plastic, because the max 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? 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
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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 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. Plus, you and your teens can choose from a number of budgeting apps like Mint.com and Smarty Pig and our favorite, Money Talks New partner Power Wallet, which you can use from your tablet or smart phone.
4. Open a checking account
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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
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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.
Keep in mind that with a joint credit account, both you and your teen are responsible for the bill. If you add a child as an authorized user on your card, you’re fully responsible for the bill. Both methods can help teens 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 parents want teens to have their own plastic but are worried they may mess up their credit or yours, a parent can 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 a prepaid card, it’ll prevent overspending — and often carry higher fees than traditional cards. But secured credit cards still help build credit.
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.
To learn more, read: “The Truth About Secured Credit Cards.”
6. Set a good example
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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 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.