Educating teens about credit |
|
|
|
"People have to learn this stuff sometime," says John
Parfrey, director of the High School Financial Planning Program
for the National Endowment for Financial Education, or NEFE. "Managing
credit is all about establishing those healthy habits and patterns
early."
Mark agrees.
"If you're letting your kid under 18 use a credit
card, make sure you're teaching them the skills of spending and
then paying
off in full immediately," he says. "That's Credit 101."
There are three ways to go: You can get a joint credit
card, which means you and your child are jointly
responsible for the debt; you can get a secured credit card,
which is tied to the teen's savings account, or you can make your
teen an authorized user, which means you, not your child, are responsible
for the debt.
As a first foray into credit, Minker
recommends a low-limit joint credit card in the teen's name, backed
by a co-signing parent. A person younger than 18 cannot apply for
a credit card without a parent's approval, so this is a good way
for a parent to monitor a teen's card use while building a credit
history for the teen.
Though the joint arrangement allows parents
to keep a rein on the card's limit, Junior should be responsible for paying the
bill in full. "That forces him to start thinking about having enough money set
aside by the end of the month," Minker says. Once the statement
arrives, or whenever you track card activity online, he advises, "sit down with
your kid for 10 minutes and go over what was spent." Ideally, he says, "the teen
wouldn't be using the card for clothing or food; it'd be used in case of an emergency,
or to finally buy something they've been saving up for."
Mark concurs: "They shouldn't be using it as a short-term
loan or as a way to leverage their lifestyle."
All of this training is undercut, however,
if parents "swoop in and save the kid" from the consequences of overspending,
says Minker. "I'd much rather have my daughter fall on her face while she's under
my roof -- but if I bail her out every time, that sends the wrong message."
Another option is a secured credit
card tied to the teen's savings account. The card's limit is usually
equal to the teen's savings account balance. If the teen misses
a monthly payment, the bank takes it from the savings account. This
type of card also helps build a credit history. The downside of
a secured card is that the annual percentage rate, or APR of interest
is high, between 13 percent and 24 percent. Credit unions often
have lower APRs, so it's worth shopping
around.
Finally, there's the option of making
your teen an authorized user of your
credit card. It's convenient, it's easy, it's commonly done -- but
it could result in a megasplurge, potentially putting your budget,
and good credit score, at risk. Here again, "supervision is the
key," says Minker.
| 
