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Chances are that, in spite of any efforts you might make to the contrary, your child is going to be interested in using credit. Credit can be helpful in terms of preparing for the future, and building good personal finance habits, and building a history that can be used to help your child secure good rates for home and auto loans. However, credit, like so many other money tools, can be financially devastating if abused. It is up to you to teach your child sound financial principles, including the wise use of credit. Here are three steps to teaching your child about responsible credit use:
1. Begin with a debit card attached to a checking account
By the time your child is 16, he or she should have a checking account. Hopefully, you have also taught him or her sound financial principles, such as saving, charitable giving and considering purchases on the basis of needs versus wants. Go over checking account statements with your child every month. Teach him or her to record debit purchases when they happen. Encourage them to record debit purchases each day in a checkbook register, ledger book or personal finance software program. Reviewing monthly statements will help you get a feel for your child’s budgeting behavior, and help you gauge whether or not it is time to move on to the next step.
2. Put your teenager on your credit card
When your child has demonstrated responsible use of the debt card, it is time to try things out with a credit card. Add your teen as an “authorized user” on your credit card. You are still liable for the charges on the card, and making payments, even though this will show up on your child’s credit history as well as yours. Be clear that your child is responsible for paying what he or she charges on the card. You might even have him or her pay the interest if a balance has to be carried. Be clear about the rules; if your teenager doesn’t obey them, remove him or her from the card.
3. Encourage your teen to apply for his or her own card
When you feel that your teen is ready for his or her own card, and you are satisfied with the responsibility shown (this might take one to three years), encourage your child to get his or her own credit card. Your child will have to be 18, and you may have to co-sign, especially if your child tries to get a credit card after the rules from the Credit CARD Act take effect in February 2010. The new rules require a co-signer for those under 21 who can’t prove that they have a job that will allow them to make payments. If you co-sign, you will be on the hook, so make sure you properly monitor the account, and revoke privileges if your child gets out of hand.
It can be scary to think of your child using a credit card. However, it is likely to happen at some point. It is best if you can manage to introduce credit in such a way as to develop a habit of using it wisely. Some things to emphasize as you teach your child about credit include:
- Never charge more than you can pay off in a month.
- Only use a credit card if you already have the money to pay for it.
- Make all payments on time.
- Keep track of what you put on your credit card in a ledger or in personal finance software.
You should also be aware that your example will go a long way toward influencing your child. So make sure that you are following good financial habits as well!