Putting Teens on the Path to Good Credit
Your teen could probably not care less about his or her credit score, and to be honest, there's little he or she can do about it before college. But ensuring your child's financial responsibility and good credit in the future means starting early. Much like learning a second language, acquiring financial literacy is best suited for the young.
Talk it out
"Have a conversation about money," advises Laura Levine, director of Jump$tart Coalition, which promotes financial literacy in students. "That goes a long way to opening their eyes about personal finance." Talking about money makes sense, but it's easier said than done. What do you talk about? Even a child as young as 6 can understand what money does and that it doesn't appear out of nowhere–that the time you spend working translates into the cash that comes out of the ATM. As your kids get older, when they can recognize what a credit card is, explain that credit is a form of debt and that Visa and MasterCard do not equal free money. Give examples, like how having bad credit can cost hundreds of thousands of dollars over a lifetime. And don't just throw out big numbers. Make clear that that's enough money to buy a house.
If you're still finding it difficult to get the words out, head for the Internet, to sites such as Wells Fargo's Hands On Banking program, for more help. Just broaching the subject, even if your kid doesn't comprehend it 100 percent at the time, will make it easier for him to ask the right questions when the time comes.
Take Scott Weaver, for instance. The 23-year-old student and Web developer from Orange County, Calif., has already wrangled with a collections agency over unwanted magazine subscriptions, nearly became victim of a vacation prize scam, and says he has earned the perpetual disdain of his accountant. On the other hand, Weaver is the first to say that his wife is his better half when it comes to money. Weaver lavishes endless praise on his wife and notes her parents had always talked openly and frequently about finances. Taking a cue from his in-laws, Weaver has learned at least one important lesson: "I'm definitely talking to my kids about it."
Embrace an allowance, teach budgeting, and stick to your guns
Advice and guidance are great, but the next step is to give your kids money–and all the responsibility that comes with it. Set up an allowance system, and make your kids pay for their day-to-day expenses. Establish a clothing budget or a limit to what can be spent on "wants." If they blow through a month's worth of money in a week and come begging for more, say no. Sooner or later, they'll get the message and budget for next time. "It's a matter of having the willpower and discipline," says Levine.
Almost half of Americans spend more than they make–on average, $1.22 for every dollar in income. Credit card debt and bankruptcy filings have reached record levels. In such an atmosphere, exercising self-control over your spending is one of the few protections against debt and subsequent lousy credit.
Even better than just creating budgets is getting kids to work for their money. "There's no value to money if they didn't have to go and work for it," says Max Jaffe, an accountant and author of My Money, Myself. Have them do chores or get a job, he advises. "Make them trade their time for money."
Open checking and savings accounts, and get plastic into their hands
Monthly statements, paying balances, and using cards to spend money are pretty abstract concepts, so get your kids started early. Have them manage their own accounts to see where each dime goes.
Debit cards, which allow users to spend straight out of a checking or savings account, can simulate the credit card experience, as well as prepaid credit cards. While prepaid cards work similarly to debit cards, ones aimed at teens (some as young as 13) can have built-in restrictions so the child can't purchase illicit goods, such as pornography, while also allowing parents to view buying activity. They also usually come loaded with extra charges and fees.
Some financial advisers oppose putting plastic into kids' hands, saying it does little to teach the value of money, but others say the earlier the exposure to credit, the better. "Don't take the 'just say no' attitude with credit cards," says author Liz Pulliam Weston. Eighty percent of college students have a credit card, and to delay the inevitable is also missing an opportunity to give your son or daughter experience with credit while still looking over his or her shoulder.
If you're really concerned just about your child's credit score itself, sign him up to one of your credit card accounts. Most of the time, this will be reported on his credit report later in life and can boost his score (that is, if you maintain your own finances well). But giving your child unfettered access to your own account can be highly risky, especially if he is likely to be irresponsible and you can't cover his expenses. This sort of trust should be followed up with plenty of oversight and guidance–and never be used as a substitute for teaching good habits. One good account on a young person's report won't mean much if he mismanages everything else on his own.
More about credit:
• Building Good Credit: A Guide for Young People and Parents
• Who Checks Your Credit Report?