Kids and Credit - Good or Bad Mix?

Credit card debt can be a stumbling block for young people just beginning this adventure we call life. The “buy-now; pay-later” attitude of American’s and easy availability of credit has resulted in a flood of 18 – 25 year olds already maxing out their credit limits. The average college graduate is leaving academia with over $5,000 in credit card debt. So as important as credit is, how can parents lead their kids safely through the labyrinth of credit card terms and conditions and teach them to use credit wisely?

Begin with Responsible Money Habits

Building a healthy credit history helps to set the stage to insure the ability to obtain a mortgage or auto loan down the road. Although many people begin using credit cards for that purpose, if not handled carefully they can actually to more damage than good. So the first step when introducing credit to your kids is to teach responsible financial habits.

1. Plan a budget together and explain the importance of sticking with it.
2. Examine the monthly purchases with your child and teach to differentiate between necessities and non-essentials. Teach kids not to rationalize buying something that they want but don’t need, especially if they’re approaching your credit limit. Impulsive spending is a hard habit to break once it has begun.
3. Enforce on-time payments of the entire month’s charges. By making it a habit to pay for everything they purchase, your child will avoid the two things that can hurt their credit the most: high balances and late payments.

Before your child borrows with credit, make sure the cost of borrowing is understood. How compound interest is calculated, the repercussions of paying late and other costs associated with using credit. Have them spend some time on the internet doing research on these topics. Make it a prerequisite for getting a credit card.

One good reason to teach your children about credit is that you still maintain control. Also, parental backup and support will help correct any mistake they may make before it becomes unmanageable. By being able to watch over their actions, you'll be sure they don't get duped into wasteful monthly charges or a victim of identity thieves.

Choosing the Best Card for Kids

Some experts suggest that you begin your child out with a debit card that uses funds directly from your checking account. Deposit their allowance or paycheck into your account and have them keep a ledger of their activity. Consider using overdraft protection while they’re learning to manage their account.

When your child is driving, get them a gasoline credit card with a strict limit on the amount they can spend. This will be their first experience with traditional credit.

To qualify for a credit card for the first time may require you to open a joint account. Adding your child to an existing account or piggybacking no longer helps build their credit. When it comes to choosing the actual card, have your child do the research and discuss it with you. Look for a card with low limit, no annual fee and a low APR. Being an informed consumer is an important skill and by researching the details of each card, your child will learn not to accept the first offer that comes along.

Helping your child to have increased responsibility over their own finances is a great way to help them launch into adulthood. Allowing them to be more accountable over time is an important leg up that every parent can offer their child.