With ballooning student debt to look forward to once they graduate, kids need all the help they can get to handle money – especially credit cards – responsibly. Unfortunately, many parents aren’t stepping up to the plate. According to CNBC, only 63% of parents have discussed money management with their students by the time they begin college. While financial literacy is important at any age, it’s even more critical as your child begins to build credit. Keep these tips in mind if you need a place to start.
When should kids get credit?
Though you can – and should – explain credit cards to your children once they’re old enough to ask, it isn’t necessary for them to access credit until they’re much older. Some experts recommend giving your kids their first credit card when they start driving, and are more likely to need cash when you’re not present. Others suggest college. Of course, if you don’t feel your child is ready for credit, you can say no – and they’ll have to listen. Thanks to the Credit CARD Act of 2009, most kids 21 and under can’t sign up for credit without a co-signer.
That said, it’s a great idea to take out a credit card and add your child as an authorized user, even if you never let him or her touch the card. This helps build credit history, so when it comes time to get a card independently, your child can get better terms.
What should your kids know about credit?
Hopefully, if you’ve decided your kid is ready for a credit card, you’ve already given them a strong background in money management. At the very least, they should understand budgeting and the difference between “needs” and “wants.” If they’ve got the basics down, and they’re ready to sign up, make sure they know:
- How to get credit. When your child gets their first credit card – whether it’s truly their own, or they’re becoming an authorized user on yours – go through the entire process with them, from beginning to end. This may include visiting your bank and discussing different credit card offers – including interest rates and credit limits – and setting up automatic payments, or other tools. Be sure they understand credit card vocabulary so they can participate.
- What to use it for. Your child should know how, ideally, you’d like them to use credit. Is it just for emergencies? Are they allowed to make pre-approved purchases, like school clothes or textbooks? If there are differences between how you use credit, and how your child is allowed to use it, explain them. Then monitor their use, and don’t be afraid to ask if you notice something amiss.
- Who pays the bill. Before the first bill arrives, you and your child should agree on who’s responsible for the charges. If you’ll help them pay, they should be aware of exactly what items, or types of items, you’ll cover, and how much. However, your child should probably be responsible for at least partial payments in order for the card to serve as a teaching tool.
- How to build credit. Discuss the consequences for late payment, including fees and interest rate hikes, and ensure that your child knows how to check their credit score. They should also know how their spending habits affect it. Discourage them from opening too many credit accounts, if they’re old enough to do this without your consent.
- How to avoid fraud. Teach your child how to keep a credit card safe and to monitor statements. Remind them how to make a safe password for online banking and discourage password reuse. And if your child is allowed to shop online with their card, be sure they understand how to distinguish safe sites and secure wifi connections.
The more input (and responsibility) your child has for their credit card, the more careful they’ll be – in general – not to misuse it. And the more solid your child’s financial knowledge is, the more confident they can be in picking a card with you.
The Bottom Line
Even if you’ve modeled financial responsibility for your kids all their lives, it’s important to be explicit about responsible credit usage. After all, if your teen or college student has a credit card, they likely share it with you, and their use – or misuse – will affect your credit, as well as theirs. Money can be a touchy subject, and kids will often interpret your concern as condescension. But don’t be deterred. As long as the lines of communication are open, you should be able to minimize your kids’ credit mistakes, and turn the ones that do occur into valuable lessons.
Child image via Shutterstock