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Teens and Credit
Most parents understand their role in teaching their children lessons in morality, ethics and compassion. But many miss the boat when it comes to teaching their kids another lesson that is vital for survival in the adult world: how to handle credit.
If you don’t teach your children about credit before they go to college, the chances are that they will learn the hard way, by taking one of the many credit card offers that are available to college students and then running up a big bill. In fact, studies show that the average college student graduates with thousands of dollars in credit card debt. You don’t want your kids to end up adding to those statistics.
In addition, you want them to start creating their own credit histories, so that when they need to borrow significant money for a car, for example, or later for a house, they not only will get the loan but also will get a good rate.
Start with a discussion – or better yet, multiple discussions -- about how credit works. Explain to your teens that anything they buy with a credit card must be paid for, and that if they don’t pay promptly, they will end up paying lots more in high interest rates and fees. Explain the importance of establishing a good credit record and caution them that late or missed payments can compromise their credit for years to come.
Eventually, of course, they will need to start using credit. There are several options:
- Get a debit card. These look like and can function like credit cards, but there is no chance of running up a big bill because they take money directly from the teen’s checking account. They are often a first step to get kids used to handling plastic, and many parents introduce them to kids as early as middle school. However, they do not teach teens about making payments on time, and they don’t help teens build a credit history.
- Let your children use your credit card. The advantage is that you can monitor their spending. However, they have access to your credit limit, so it is possible for them to spend a lot of money before you get your bill. In addition, if they lose the card or if it is stolen from them, your credit is in the hands of thieves. And, like a debit card, it will not help them build a credit history.
- Get a low-limit credit card. These cap the amount your teens can spend -- $500 is a popular limit. And if they pay on time, it helps them build a positive credit history. On the other hand, if they don’t pay on time, it hurts their credit history. You might want to closely monitor their use of this kind of card, especially in the beginning.
- Choose a regular credit card. Sooner or later, of course, your teens have to fly solo. Once they turn 18, they will be inundated with credit card offers. Help them choose from among the offers, weighing issues like annual fees, interest rates, etc. Have one last chat about using credit wisely, and then cross your fingers and set them free.