Tuesday’s Wall Street Journal had a useful article for parents on how to “train” their teens to start using credit cards wisely. The main goal is to teach youths to build a credit history without falling into debt.
The article makes a strong point: While it is a great gift to allow your child to graduate college debt-free, in the real world, not having a credit history can also be a significant drawback.
Some parents take out college loans with the intent of helping their children build their credit history when the money is paid back. Of course, this is only effective if the loans are managed properly and paid back on time each month. Some of the tips offered in the piece can help this kind of situation, replicating real-life instances that can be “practiced” so teens are not experiencing them for the first time when they get their own credit cards:
Do a Debit-Card Test Drive
When his son started his senior year in high school last year, Mr. Arnold helped him open a checking account and gave him a debit card. If his son proves to be a responsible debit-card user, Mr. Arnold says, he may be willing to co-sign a credit card during his son’s sophomore year in college.Make Your Child an Authorized User
If putting yourself on the hook for your child’s spending makes you uncomfortable, you can take a safer approach by making your child an authorized user of one or more of your credit cards. This way, the payment history of the card will appear on the child’s credit file and help him or her build a good credit history–assuming, of course, that the parent handles the card responsibly.
For me, this kind of system would have been helpful when I got my first debit card. On my 18th birthday, my Dad and I went to the bank to set up my debit account. But turning 18 didn’t necessarily mean I had all the answers on how to be an adult and manage my own money. A system like this could have helped me transition into things like avoiding overdraft charges. Luckily, I was able to use my time in college to become a responsible money manager, and I understand that if I want to spend money, I have to make it.
It’s a great feeling to control your own finances (and a weight off your parents) but readers beware, it takes work and responsibility to achieve financial independence. So start as early as you can!
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[...] Don’t put anything on credit that you can’t afford to pay off at the end of the month. [...]
[...] There is a host of new financial products to teach youths about managing their money before they’re even old enough to open their own credit lines. More banks are offering text alerts for your credit or debit card if your child is an authorized user. And now there are more options for giving kids autonomy over their own finances. As we’ve explored here before, these products are critically important if the next generation is to avoid repeating recent history’s mistakes. [...]