By: Dan Kadlec
December 29, 2011
4 ways to start your kids with credit
Most parents with heavy credit card debt want their kids to avoid the same mistake. But they are not sure how to coach them and, according to a new survey, would love for credit card management to be a required class in high school.
It's not, and may never be. The push for financial education in the classroom has stalled amid a sea of inconclusive studies related to what works and what is fantasy. But every day brings another example of why we need to figure this out. The latest: credit card payments on Black Friday rose 7.4% from last year--twice the rate of more financially conservative debit cards. People are borrowing and spending again even though the economy remains shaky.
Consumer Education Services, a nonprofit promoting financial literacy, surveyed adults carrying more than $1,000 of credit card debt. Fully two-thirds said students should be required to take a class on how to use credit cards. Only 5% had taken such a course themselves, suggesting they believe that some instruction would have helped them stay out of fiscal trouble.
Mired in debt, many do not feel qualified to teach their kids about credit. That's one reason they want it done in a classroom. But since that won't happen anytime soon, at least not a broad scale, they'd better get over their fear of finance and share some credit card wisdom with the kids. This is a great time of year for that talk. College students are home for the holidays and the temptation to spend is at a peak. There are four basic routes to introduce your kids to credit cards while minimizing risks:
•Co-sign for a credit card in your child's name. This is a great way to help your child build credit and makes it easy to monitor the account. But if Junior goes on a spending spree you'll be on the hook, and if you're not paying attention it will drag down your credit rating along with your child's.
•Add your child as an authorized user. One call to your credit-card issuer and you can make your child an authorized user on your card. This will help build the child's credit, and you can shut down an irresponsible child's card privileges with one call as well. But you will pay the bills; your child gets no real practice handling credit or learning to pay on time.
•Get a debit or secured card. A debit card will not help build a credit profile. But it gives a child practice tracking spending and reconciling accounts. Because it is tied to a checking account, you risk incurring overdraft fees. A secured card is tied to a savings account. If a payment is missed the bank automatically takes the money from savings. Your child will build credit. But look out for high fees.
•Use a prepaid card. In most cases, your child is better off with a debit card tied to a checking account than with a prepaid card, which comes with reloading fees and other expenses. Your child will not build credit or get practice paying bills. But you will have the most control over how much money is available with the least amount of risk.