Every day, parents are faced with the gargantuan task of getting their kids up to speed on life skills and readying them for success outside the nest.
Gaining a grounding in personal finance is indispensable for our kids' futures, and data from the Investor Education Foundation reveals that high schoolers who take personal finance classes have above average credit scores and lower rates of debt delinquency as adults.
Yet despite these overwhelming benefits, local school systems across America offer few or no financial literacy courses to their students. The fact is, it's up to you to teach your kids about spending, saving and using credit cards properly.
When it comes to credit, the law and the finance industry make it easy to get started, allowing teens to legally obtain their first credit card at 18 years old. At the same time, we know the statistics: collectively, Americans have more than $1 trillion in credit card debt.
Many parents balk at the thought of giving their kid a credit card given the negative long-term impacts of a bad credit score. While building and maintaining a good credit score opens doors to education loans and home ownership down the road, a history of bad credit can shut them just as fast.
How are parents supposed to navigate this issue?
Luckily, your kid doesn't have to jump in the deep end with credit right away. Since in the United States of America the Credit Card Accountability Responsibility and Disclosure Act (CARD) came into play in 2009, parents legally have a bigger role to play in determining if their child can get a credit card.
For credit card applicants under 21, the CARD Act requires proof of income to qualify for an account. If a teen doesn’t have verifiable income, he or she needs to have a parent or guardian co-sign for their card.
There are lots of options available to help you manage your teen's credit when they get started. For example, you can request your card issuer to add your child to your own account, making him or her an authorized user. Or you may decide to set them up with their own prepaid debit card.
Getting your teen started this way will allow you to monitor and coach them through their first purchases and bill payments and ensure that they develop good habits. Become familiar with paying their bill off entirely every month and maintaining a low credit utilization will get their credit score off to a great start. As simple as these two skills are to learn, not doing these things ranks among the most frequent mistakes made by credit users.
In addition to these options, teens need to have a certain level of maturity to use credit cards responsibly. Those who have had an introduction to saving and banking and who tend to be organized are definitely on the right track to success. Giving your child a solid understanding of basic money topics will prepare them for the world of credit.
It's never too early or too late to get started in responsible finance-but before you sign on to giving your teen his or her first credit card, make sure to get them a good grounding with these basics:
1. Open a checking account
Children between the ages of 13 and 16 can understand the basic concept of financial responsibility and can start to use a checking account.
According to Gail Cunningham of the National Foundation for Credit Counseling, parents can gauge their teenager's financial responsibility by monitoring how they manage the checking account. If your teen has either overdrawn the balance or ignored the account, he or she is not ready for a credit card.
On the other hand, if they put money in and make purchases regularly, it's a good indication of interest and engagement with their finances. Most banks offer checking accounts that come with monitoring tools for parents. If your teen manages his or her account responsibly and regularly, he or she might be a good candidate for a credit card.
2. Monitor spending behavior
Parents should monitor their child's everyday spending to gauge whether or not they are responsible spenders. Since they already have a budget set by your income or theirs (ie. depositing their allowance or earnings from a part-time job), you can usually tell if your child is overspending or responsible.
Do they ask you for money often? Do they seem to want to buy more things than they can afford? If you’re paying for their cell phone bill, then how often do they make in-app purchases, go over their talk time, or otherwise overspend on your dime? Being conscious of other people's money is an equally good indication of a teen's financial responsibility as managing their own.
If your teenager is showing responsibility in their everyday spending, he or she could be a good candidate for a credit card. However, if they spend irresponsibly, impatiently, impulsively, or do not seem to understand the value of your money-then they are probably not ready yet.
If this sound like your teen, then take some time to work on instilling basic financial skills including learning to save up to buy things they want, delaying a purchase until they have the funds, and starting a savings account. This last method will help even big spenders get into the habit of splitting their income and putting some money aside for later.
3. Learn how a credit card works
When starting out, most teenagers and not a small number of adults perceive credit cards as free money. They think all they need to do is make the minimum monthly payment to maintain a decent credit score. This is clearly not the case.
Before your teenager gets a credit card, they have to understand how a credit card works. If you have a younger child at home or just want to be cautious with your teen, get them started on understanding how credit works with the following exercise. The next time your kid asks you for money, lend them the funds-but explain to them that you'll be charging them a monthly interest on the money they owe you.
Explain that they don't have to pay you back all of it right away, but that the sooner they pay you back, the less they will pay, and the more trust they'll be building with you. More trust might equal more loans in the future. Keep this credit simulation simple at first and start with fairly small loans. You want to set them up for success, so that every time they succeed in paying off their "bill," they will feel a sense of accomplishment. Make sure they understand how the system works and how to succeed within it.
If your teen won't play along, then they're not willing to understand the game and they might not be ready to get involved with real-world credit just yet. On the other hand, if they enjoy the challenge of paying you back on time consistently and gaining your trust ("a good credit rating"), then they might be ready to explore some of the starting credit options mentioned above.
This method might seem a bit heavy handed, but it's a useful simulation to show beginners how credit works. Finally, when your kid has mastered your credit simulation and you think they might be ready for the real deal, make sure they understand credit in more detail: the importance of making monthly payments, what a credit score is and how to have a good one, lines of credit, APR, and credit card fees.
4. Demonstrate honesty
Honesty is a big indicator of maturity and responsibility. If your teen is dishonest about his or her spending, consider this a red flag. Some examples of dishonesty are spending their lunch money (or any money you give them) on something else and trying to hide it or "borrowing" money from your wallet without asking. These kinds of actions indicate that your child is not in control of their own money and of their desire to purchase things before they save up for it themselves.
While small moments of dishonesty might not seem like a big deal, things can quickly spiral out of control if your teen gets a credit card in their hand. That's why these tendencies need to be resolved before your teen gets access to credit. Instead of only punishing them for bad behavior, you can take this time to help them develop better spending habits.
It's never too late to give a quick refresher talk on how to save up for things they want or to set up the credit simulation game outlined in #3. Creating an open dialogue about money will remove the need for deception and will open the door to an honest relationship with money. Talking about money shouldn't be taboo.
5. Meet deadlines
One of the most important credit card rules is making your payments by the due date every month. Failure to pay without notifying the card provider can lead to late payment penalties or cancellation of the card. Before your teenager gets a credit card, you should be sure that he or she can meet deadlines reliably.
If your teen is a procrastinator or is always asking for a homework extension, they might not be ready to make repayments on time. At home, try giving them tasks and setting deadlines to assess how well they can meet them. If your teenager consistently misses deadlines, you should get to work on helping them become more organized. Making deadlines is an important skill for personal finance, but also in their future workplace and their family life. Your teen's cell phone habit can actually be useful here. There lots of great free and paid mobile apps to help them get organized. No-one can remember everything, so get them into the habit of putting assignment deadlines, payment due dates, and appointments into their phones and setting a sound or vibrating alert in advance of the date and time. With consistent use of these reminders, they'll become more organized and able to meet their commitments. Their growing ability to be organized and responsible will help them in all areas of their lives and will prepare them for a credit card in the future.
6. Demonstrate commitment to earning and growth
Another way to see if your teen might be ready for a credit card is to assess their commitment to their financial future. Does he have a side hustle or a part-time job? Does she track her spending? Is he eager to save or set aside money for short and long-term goals? These are just a few ways to tell if your teen is committed to their finances and their own goals. If your teen is showing signs of commitment to making more money and creating financial goals and achieving them, then they might be ready to get involved with some form of credit.
Why give your teenager a credit card?
Although some parents give their teens credit cards, many others wonder why they should even bother with this potentially messy idea. Credit cards can cause huge damage to finances, especially in the hands of teens who are not prepared to use them. However, finance experts confirm that the best time to teach a teen how to use a credit card responsibly is while they are still living at home with you.
While your kid is still under your roof, you can help them create a healthy relationship with money and credit, guide them to develop basic finance skills and habits, and bail them out if there’s an emergency. In fact, the teenage years might be the ideal time to teach these essential personal finance skills-because the minute your teen leaves your house, he or she will be swamped with credit card offers. Given this reality, it's definitely a good idea to get ahead in the credit game!