Think back to how you first were introduced to credit; for me it was college spring break. I ran out of clean shirts, so I filled out the credit app to get the free t-shirt! Now I have a credit card, but no idea how to be responsible with it. Luckily, I spent several years in the Marines prior to college, so I was a little better off than most kids that get credit cards for the first time in college. But that is my point for this little note kids do not get enough education with finance in general and especially credit.
In the past, credit card companies rush to college campuses (even some high schools) to sign up students who possess no visible means of ever repaying the credit card. For some, making even the minimum payment could become impossible, and ruin their credit for years.
The ideal time to begin this credit process is when your kids hit 16, with many restrictions of course! Keep in mind that if you do consider co-signing a credit card you are still on the hook, as is your credit! There are a couple of steps you can take to ensure that your kids begin to use credit wisely and develop great habits:
Step 1 – Open up a checking account and ask for a debit card to be attached to the account. On a monthly basis sit down with them and review how much is in the account, how much they have to spend, and where they spend their money. Explain overdraft fees and ATM fees and how to set up bill pay. If they manage that responsibly for 6 months (to a year), time for the next level! Note that a debit card will not help their credit scores.
Step 2 – Add them as an authorized user to your credit card account. They will get a credit card with their name on it, and they will start to establish their own credit history. Set a limit. Determine who will pay for each charge, and how. (see bill pay in step 1) Do that for 6 months and they should be ready to fly on their own!
Step 3 – They have demonstrated that they can manage credit responsibly, so the next step is to co-sign on a card with them, but they are accountable. Still sit down with them monthly and then spot check them after that. Create a Username and Password so you can also watch what is happening online.
There you go, another reason to bond with your kids and teach life lessons, we don’t have enough to worry about with our kids growing up anyway, right…?
I have a great spreadsheet that goes over interest, compounding interest (it really is the 8th wonder of the world!) and the effect interest and loans have on our overall finances, shot me a message if you want to go over it and get a copy for your family!
If you have any other tips, let me know, I would be glad to get some more ideas as well!
Scott Davis
703.209.3138 cell