How to teach kids about credit
When kids are preteens (or younger), explain how credit cards work while you’re out shopping. When money doesn’t exchange hands, it looks an awful lot like the merchandise is free to a young observer. So make sure you really emphasize the part about how the bill will show up later and that you’ll have to pay for everything you put on a credit card.
If you’re comfortable with the state of your finances, you can show young teens your credit card statement. If you are carrying some debt, explain how this happened (hey, it happens to almost everyone at some point in life) and how you plan to pay it off. Show your teen the box that shows how long it will take to pay off your balance – and especially, how much you’ll pay in interest – if you only pay minimums. Honestly, I think that the addition of that information to the credit card statement is one of the best parts of the CARD Act. There’s nothing like seeing the cold, hard numbers to spur you into action to pay down the debt as quickly as you can.
When your teen is old enough for a job, introduce a debit card that’s tied to your teen’s checking account. This is a great way to develop the discipline required to handle credit. You have a balance and you spend within your means. It’s also better than having your teen carry around a large amount of cash. But don’t opt for overdraft protection. This is a chance for your teen to make a connection between plastic and spending limits. Sure, it’s not a credit card, but we’re talking about concepts right now.
When your teen successfully handles a debit card, you have some choices. You can consider a prepaid debit card (one without outrageous fees) or a secured credit card. Another option for an older teen is to make your child an authorized user on your account so you can monitor activity. This works even better if you tie your account into a free money management tool such as Mint. Imagine a pie chart showing how much your teen spent at the mall.
Now, if you’re a person who’s sworn off credit cards, I respect your decision. They aren’t for everyone. But you still need to educate your teen about credit. Once they’re out in the world, your kid will be exposed to credit cards. Although the CARD Act prohibits issuers from pursuing college kids under the age of 21, both issuers and college kids are finding ways to get around it. It’s up to you to make sure your child is equipped to make smart financial decisions, and this includes credit.
Being proactive about this ensures that it’s you—and not the credit card issuer—who introduces your child to credit cards.