You really need to start when they’re very young – with savings accounts, or even a box at home where they can save up money to buy something special. As they get a bit older and proficient at math, they should learn about checking accounts and how to track expenditures. They should also learn how to balance the bank account.
Learning those things early on will make them much less apt to go crazy with spending the first time they hold a piece of plastic with their own name embossed on the front.
If you didn’t start early, there’s no better time than now. They need to understand the basics before they have access to plastic money. That said, when the time is right, you have choices in how you’ll introduce him or her to the world of credit.
A simple way is to add your child’s name as an authorized user on your own card. As long as your credit is good, it will help your child to build credit as well. But that might not be the best choice.
If you add your child’s name to a card on which you carry a balance, the lesson may be lost. It’s better if the card your child uses is used for nothing but his or her expenses. That way you can both see and track purchases, and your child can see clearly how many dollars it costs when that balance isn’t paid in full each month. This is part of the lesson you want to teach.
If your teen has an “I can’t live without this item” and wants to charge it, you should first sit down together and go over the real cost. If the item is $100 and he or she can only pay $10 per month – show him how much extra he’ll pay in interest.
This is a good time to teach budgeting, so your child can see that if he runs up debt he’ll have that much less to spend next month.
You also need to establish some clear rules about how the card will be used. Will he buy his lunch every day with the card and then pay it off in full at the end of the month? Is the card for clothing, music, or entertainment? If so, who pays the bill? And what are the consequences for not making the payment – or not making it on time?
A second method is to help your child get his or her own card. You will probably have to co-sign, however. That means you will still be liable for the debt and your own credit will suffer if bills aren’t paid on time.
Both of these methods leave you open to “spoiling” the lessons. Because you won’t want a late payment on your credit report, you will probably jump in and bail out your child if he or she gets in a mess. And as we know, being rescued from our mistakes isn’t the way to learn lessons.
Stored-value cards are another option for helping kids learn how to handle money. These are actually pre-paid cards, so have no value in building a credit report. They’re convenient, because in most cases, your teen can have their paycheck deposited directly into the card.
Stored value cards are really the same thing as a checking account – except plastic.
Several banks are offering stored value cards, but they come with a big drawback: Almost every action – such as an enrollment, a reloading deposit or a balance inquiry – comes with a fee. There’s even a fee for inactivity if you don’t use the card for a few months.
It might be safer to set up a checking account. But if you choose that route, take the time to explain the consequences of writing a check for more than your available balance.
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