Money Talks: Preparing Your Teen to Be a Responsible Credit Card User
When was the last time you used cash to pay for a bill? Aside from paying with cash for things like getting the discounted rate at the gas pump or for your kid's allowances, many transactions are now run through credit cards.
The world is increasingly moving toward becoming cashless in favor of plastic, and it's becoming more likely that your kid is going to be a future credit card user. The following road map will guide you through understanding when to start your child's credit card education, how to start them on the path to a good credit score, and important conversations to have in order to set them up for future financial success.
When is it Appropriate to Start Your Child's Credit Card Education?
Instead of thinking about a particular age when it's appropriate to begin educating your child about credit, consider your child's knowledge about money and responsibility level.
While you likely won't have to worry about helping your child establish good credit until they're in their late teens, you may find that the tween years (between 8 and 12) is a good time to begin their education. Specific jumping-off points to start these conversations can include if your child receives a mailed credit card offer or when one of their friends gets a credit card. It's important to establish a healthy understanding of money management early on so they'll be prepared for the future.
A good place to start this healthy journey is with a conversation about credit.
Your Child's Road Map to Establishing Good Credit
Establishing credit at all, let alone good credit, can be kind of tricky. There are a variety of reasons for this that mainly come down to regulations limiting the ability of kids under the age of 21 to get a credit card, the importance of having a credit history to get approved for more credit, and the potential for early credit card users to make mistakes that will get reported negatively on their credit history.
Because of this, you need a road map to help your child establish a good credit history even before they leave your home.
- Get Their Own Banking Established: First off, make sure your child's own banking is all set up. This starts with a savings account, which you can use to teach your child how to read a bank statement, and then eventually includes both a checking account and a debit card.
- Add Them as an Authorized Credit Card User: When your child is ready for more responsibility, do a test run by having them added as an authorized user on your credit card. You can set this up as a trial run of about six months so that your child understands that the expectations and ground rules you set must be maintained. Choose a credit card that will report an authorized user's usage to the credit bureaus (especially if your goal is to help your child establish some credit history), and allows for customized limits for each authorized user.
- Set up Monthly Meetings: Each month, gather your credit card statement and go over it with your child. Highlight their spending ahead of time, or have them highlight and add up what they've spent. Show them how to check their balance. Review the amount of interest due on the account, the minimum payment requirements, and how to use a credit card payoff calculator so that they can see how long complete debt payoff will take.
- Consider Adding Their Name to a Household Bill: Consider adding your child to a bill where they have a high stake — perhaps their cell phone bill — and try to get their payments reported to the credit bureaus to help establish their credit history. For example, Experian announced that through Experian Boost, you can start having your cell phone and utility payments linked to your credit report.
- Help Them Graduate to Their Own Credit Card: As your child shows more responsibility and takes on more responsibility by earning money, you'll want to help them transition to their own credit. You can help on varying levels, such as helping them compare and choose credit cards or by helping them fill out their first credit card application. A secure credit card helps build credit when you don't have any — perfect for kids that are just starting out.
Once you have the conversation about credit, go over the checklist for responsible use.
Your Money Talks Checklist
The following checklist should serve as guidance on the kinds of money talks you need to have with your child about becoming a responsible credit card user — before you actually give them access to credit.
Consider addressing one topic at a time, in a series of family meetings.
- The Difference Between Debit and Credit: Use your own accounts to illustrate what happens when a debit transaction is made, and then compare this to when you make a credit card purchase. Make a debit transaction in the store with your child, and then show them how it gets deducted from your checking account balance. Around the same time, make a credit card purchase. When your credit card statement comes in, identify the transaction with your child and show them how to make a payment to cover the cost — whether that's online or via a mobile app. Discuss the role that credit plays in your family's life, and explain when you choose to use credit instead of debit.
- Your Child's Future Role as a Credit Card User: Approach this conversation in a way that will let your child relate to you. Share the lessons you've learned along your own credit journey, including any credit missteps you took and how you fixed them. If you had the chance, what would you tell your younger self?
- Why and How to Establish a Good Credit Score: Let your child know why it's important to establish good credit by pointing out ways in which doing so will directly impact them — such as their ability to rent their first apartment, how some employers may request to review your credit history as part of the hiring process, and how a credit score helps when purchasing a home or car by using a loan. Show them your personal credit score from Experian, TransUnion, or Equifax, and then show them a scale of what's considered "excellent" all the way down to "poor."
- Your Household's Ground Rules for Using Credit: Before your child uses their first credit card — whether as an authorized user on yours or when they get their own one day — ensure that they understand the ground rules. Discuss spending limits, credit limits, the need to stay within a certain debt to income ratio to help with credit scores, and any personal rules you have. Who is going to pay for the purchases? How will your child handle pressure from friends to pay using their new credit card, or temptation to spend on the credit card even without having the money in their account to pay for it?
- Talking to Credit Card Companies about How to Use the Card: Have your child listen in as you ask a credit card company rep to go over the other rules with the card your kid will use. This may include the number of days between making a purchase, what an interest rate is and when it starts to accrue, and any information about annual fees. Ask the rep to explain to your child how their company reports credit card usage to the major credit bureaus, what impact that can have on a person's credit history (both good, and bad), and the process for checking your credit score.
- What Happens When Your Card Has Been Compromised: Your child needs to know what to do in case their credit card is lost, or if they think there's been a transaction without their authorization. Walk them through how they would need to find the credit card issuer's phone number to call the company, how the company will go over their transaction details with them to search for any questionable ones, and how they should have a backup way to spend money because the credit card company will likely have to issue them a new one (which may take a few days). They can also easily lock their credit card through their online account — freezing all further spending on the credit card.
Guide your child through understanding the basics of credit and establishing responsible borrowing habits, and you'll help to ensure that they build the kind of money management skills that will serve them well in the future.