Why You Need to Teach Kids about Credit

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I’ve recently been getting offers for prepaid debit cards targeted at young teens. Here’s the first sentence of one I got a few days ago: “It’s not always convenient to give teens money when they need it.” No kidding! This offer was targeting my 14-year-old son, but the letter was addressed to me and it’s selling me the idea of convenience.

Prepare to start seeing a lot of these offers. On the one hand, I do appreciate the up-front nature of this offer, which by the way, was from American Express. At least the issuer acknowledges I’m the gatekeeper to my son’s wallet.

Remember the ill-fated Kardashian Kard and how the marketing was targeted directly at your teenager? I think we’ll see more Kardashian-inspired debit or credit cards sponsored by celebrities. But that’s only one reason why I believe it’s important to teach young kids about the concept of credit.

[Article: Getting Kids in on the National Financial Capability Challenge]

How early should you start? You can introduce basic concepts around the age of ten. Note that I said concepts, not prepaid debit or credit cards. In fact, if your kid is mature, start as soon as he or she can handle 3-digit addition. But don’t fret if you have a 15-year-old and you’ve never discussed this. I’m not going to say it’s never too late to start, though. If you wait until they graduate from high school, you’ve waited too long. It’s essential they develop responsible credit habits before they ever set foot on a college campus.

Kids mature at different rates and only you can decide which steps they’re ready for. But here are some guidelines to consider…

How to teach kids about credit »

Image: _Dinkel_, via Flickr.com

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.

[Article: Parents can track kids’ spending with new card]

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.