Getting Your Teen to Creditworthiness
Every year nearly 10 million adults will default on their credit cards. Will your child eventually be one of them? Your teen will eventually get their own credit card; why not give them the foundation for responsibly managing their credit?
For most of their lives teens are exposed to the wonderful magic of plastic money. They see us pulling credit cards out of our wallets and swiping them every day and they give it no thought, except that it can buy wonderful things. There probably isn’t a parent on the planet who hasn’t heard the following exchange:
Teen: “Mom, I need some money to go to the store.”
Parent: “Sorry, I don’t have any money for you to buy new shoes.”
Teen: “Why can’t I just use your credit card?”
Of course, you can’t fault your teen. That’s all they know. It’s also why you need to start teaching your teen about credit and how it works before they go off on their own. They will get a credit card at some point and, unless they’ve been tutored in the basic principles of financial responsibility, they may find themselves on an early path to financial ruin. The time to teach your teen financial responsibility is not when they think they’re ready for a credit card; but well before then in order to build the proper foundation for handling credit. Here’s how to lay the foundation for the proper use of credit:
Set up a Bank Account
The first personal finance tool you can introduce to your teen is a bank checking and savings account. As soon as your teen begins receiving a steady allowance or earnings from a summer or weekend job, you should take them to the bank to open an account. For minors, an account can be opened under your main account, but it will be in the name of your child. They’ll receive a checkbook and a debit card with their name on it. That’s when things begin to get real. They need to get the full sense of taking their money to the bank and depositing it in their account. They’ll be able to access their account online to track activity (as will you).
The debit card will allow them to get the feel of using plastic (it’s also a safer way to carry money). This is also a great way to encourage your teen to save a portion of their earnings because they can simply transfer funds from checking to savings online. You should sit with your teen at least once a month to review their account and their spending, and talk about budgeting and spending goals.
Secured Credit Cards
When your teen turns eighteen, you can help them obtain a secured credit card. Secured credit cards are just like regular credits cards except the credit is established by depositing money in a savings account. The savings account balance becomes their credit limit. It’s up to you whether you want to supply the initial line of credit, or have your teen use his or her own savings (might be a good incentive to for your teen to save). The card, which is issued as a Visa or MasterCard, is accepted wherever credit cards are accepted. When it is used, your teen will need to make the payments and interest charges are applied if the balance is not paid in full each month. The real value in obtaining a secured credit card is that, in most cases, the payments are reported to the credit bureaus which allows your teen to begin building a credit history (you need to check with the issuing bank to confirm that they do report payments). When your teen demonstrates responsible use of a secured credit card, he or she may be ready to graduate to the real deal.
Authorized User Account
Generally, anyone age 18 or over can apply for a credit card; however, if you are under 21 you must be able to show financial responsibility based on having a certain amount of personal income and assets. An 18 year-old can obtain a credit card as an authorized user on a parent’s account. You can simply add your teen as a user and he will be issued a separate card with his name on it. Your bank will provide a separate accounting of charges and payments which can be made directly by your teen. The big issue to consider is that you will be financially liable for your teens account balance. This is like a credit card with training wheels, providing your teen with real world opportunity to use and manage real credit; it’s just that it is really your credit. You need to check with your card issuer to see if they report the payments separately to the credit bureaus.
Take them to Bankruptcy Court
Some parents will haul their children down to the county jail or juvenile hall to give them a taste of real world consequences of running afoul of the law. It actually can be very effective; so why not take your teen to a bankruptcy court proceeding so they can view, firsthand, the consequences of mismanaging credit? It may be a stretch, but to see actual adults giving up their financial lives in a court of law may leave a lasting impression.
At age 21, your child will be able to apply for a credit card, and you can only hope you’ve built a solid foundation for his or her use of credit, because, at that point, he or she will be on their own. The advantage you have working for you is that most teens are desperate to be treated like adults, so they should be willing students. You need to catch them early, and introduce as many lessons and tools as possible at a time when money becomes a big issue for them. You really only have one shot at instilling sound money habits with your children, and of you can help them become credit worthy along the way, they will (eventually) appreciate it.