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Chances are that, in spite of any efforts you might make to the contrary, your child is going to be interested in using credit. Credit can be helpful in terms of preparing for the future, and building good personal finance habits, and building a history that can be used to help your child secure good rates for home and auto loans. However, credit, like so many other money tools, can be financially devastating if abused. It is up to you to teach your child sound financial principles, including the wise use of credit. Here are three steps to teaching your child about responsible credit use:
1. Begin with a debit card attached to a checking account
By the time your child is 16, he or she should have a checking account. Hopefully, you have also taught him or her sound financial principles, such as saving, charitable giving and considering purchases on the basis of needs versus wants. Go over checking account statements with your child every month. Teach him or her to record debit purchases when they happen. Encourage them to record debit purchases each day in a checkbook register, ledger book or personal finance software program. Reviewing monthly statements will help you get a feel for your child’s budgeting behavior, and help you gauge whether or not it is time to move on to the next step.
2. Put your teenager on your credit card
When your child has demonstrated responsible use of the debt card, it is time to try things out with a credit card. Add your teen as an “authorized user” on your credit card. You are still liable for the charges on the card, and making payments, even though this will show up on your child’s credit history as well as yours. Be clear that your child is responsible for paying what he or she charges on the card. You might even have him or her pay the interest if a balance has to be carried. Be clear about the rules; if your teenager doesn’t obey them, remove him or her from the card.
3. Encourage your teen to apply for his or her own card
When you feel that your teen is ready for his or her own card, and you are satisfied with the responsibility shown (this might take one to three years), encourage your child to get his or her own credit card. Your child will have to be 18, and you may have to co-sign, especially if your child tries to get a credit card after the rules from the Credit CARD Act take effect in February 2010. The new rules require a co-signer for those under 21 who can’t prove that they have a job that will allow them to make payments. If you co-sign, you will be on the hook, so make sure you properly monitor the account, and revoke privileges if your child gets out of hand.
It can be scary to think of your child using a credit card. However, it is likely to happen at some point. It is best if you can manage to introduce credit in such a way as to develop a habit of using it wisely. Some things to emphasize as you teach your child about credit include:
- Never charge more than you can pay off in a month.
- Only use a credit card if you already have the money to pay for it.
- Make all payments on time.
- Keep track of what you put on your credit card in a ledger or in personal finance software.
You should also be aware that your example will go a long way toward influencing your child. So make sure that you are following good financial habits as well!
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Hi, say your post come across Twitter and decided to weight in. I like what you wrote in your personal finance habits post – I’d start with paying off the smallest debt first.
In this post how about teaching children to be responsible with their personal finances instead of worrying about credit. My 3 would be:
1) Begin with a budget – that includes managing the money you give them for clothing and other basics.
2) Have your teenager start saving for something that is really important to them that will take them about 6 months to save for so they learn about delayed gratification.
3) Never encourage your child to get a credit card.
Thanks for posting,
Matt
While your advice is good for teaching children about responsible finance in general, this post is, as mentioned, about teaching children to use credit wisely. It’s a nice thought to think that they will never, ever get credit cards or use credit, but the truth is that, at some point, they most likely will. And, truth to tell, responsible credit card use can be a great tool. I get a free ticket to see my husband’s family in New York every year — without having to pay one single cent in interest. Using my rewards card responsibly saves me around $486 a year.
Great article! The one thing that this article addresses that is SO relevant is – parental advice/guidance. I know a lot of people comment on the lack of parents that actually know how, but parent-teen interaction is critical. It is all about education, education, education. I think starting early is the best method. I realize there is all this discussion about the CARD Act, but parental involvement and interaction can outweigh what the CARD Act is designed to do. I believe budgeting is very important, living within your means, understanding the basics of bank accounts, both savings and checking, and learning to save for retirement. I champion these and other personal finance tips in my recently published book, Your Money Day One: How to Start Right and End Rich. It is a personal finance book for young adults ages 15-23. It is available through amazon.com or as an MP3 download on audible.com or iTunes. Please feel free to visit my website, http://www.michaeljwagner.net.
Miranda, I respectfully disagree with some of your advice. Yes, parents need to teach their children what these types of financial tools are, how they work, and who should use them. However, I strongly disagree that you should set your child up with the financial psychology of needing or wanting to use short term financing (credit cards, auto loans, student loans) to finance their life expenses.
If you had no debt, no auto loan, no student loan, no credit card debt, and instead had 100k in your investment account at the age of 30 would you feel secure? Financially free? Is this not the situation you hope to put your children in? Children are a clean slate with no debt, what a wonderful opportunity to teach them to keep it that way.
It is not just abuse that causes financial distress. The simple use of high interest short term loans means that consumers are paying 3x the price of every purchase they make. This means that instead of saving and investing in themselves, they are paying somebody else. This is poor financial advice. Regardless if you are an on time payer or not.
Credit Scores. Ask yourself who set up credit scores? Bankers and Insurance companies. Why? To charge you higher interest rates on your loans. Whens the last time you though, wow the credit rating company really did me a favor and scored me fairly. NOT. They always find a way to ding you and charge you more. It is a well thought out algorithm to ensure the highest return on loan and insurance products.
I suggest that parents at this early age show their children how to invest in themselves. The true path to wealth is to save and invest until you reach the point where your investments pay for your basic monthly expenses. The more you use credit the longer it will be until you reach financial independence, if ever.
I humbly suggest that parents teach their kids to REJECT the use of credit cards. Teach them about how to live on a cash basis only, learn about basic investing and the huge advantage they have just for being young and investing early.
I like everything you said except #3. I think that never getting into debt with credit cards to start with would be a much better option. I wish that was the lesson that my parents had taught me instead of the horrible example I saw through the abuse of credit cards. Never starting out with credit cards is a better option any day!
I agree, Jacob, that it is important to teach kids about saving and investing. But it doesn’t have to be mutually exclusive. My parents set us all up with funds when we were younger, and required us to invest. I’ve set my son up with a college fund, and I will encourage him to open an IRA when he turns 16 and gets a job. And we sometimes look at companies and talk about individual investments. Of course investing and saving is the path to financial independence. But that doesn’t mean that credit cards won’t be involved. And I’d rather my son learn about responsible card use from me, than from trial and error. In the end, kids need guidance, and they need to know what’s out there. If all you do is say “credit cards are bad” and don’t give them guidelines, many kids will be more than happy to experiment…