4 steps to introduce your kids to credit cards
Learning how to use credit cards, and use them responsibly, is an incredibly important part of growing up these days.
While teenagers may know well the dangers of drugs and drunk driving, many don’t understand that credit cards can wreck lives too.
Our 4 safe and sane steps for introducing your teen to credit cards can help you do that while they're still at home under your watchful eye.
Step 1. Give them a crash course in credit.
Some teens don't understand that when you charge stuff on a credit card, a bill comes due at the end of the month. Even fewer teens understand interest and how it is calculated.
Review one of your credit card statements with them.
Explain the different elements such as interest rates, interest charges and minimum amount due.
Then have them play with an online debt calculator to figure out how long it would take to pay off your balance with just the minimum payment.
Next, have them plug in the cost of an item they want at a card's interest rate to see how much it could truly end up costing to buy it on credit.
Throw in some big numbers and use it as a financial version of a "scared straight" program. Show them how a $100 shopping trip to the mall can turn into a $250 one with interest and late charges.
Illustrate the dark side of credit cards, and don’t be scared to instill in them a financially healthy fear of interest charges, unnecessary fees and runaway debt.
Step 2. Start them out with a prepaid debit card.
A prepaid debit card is a good way for them to learn the basics of using a credit card but with very little risk to you.
Prepaid debit cards strictly limit the amount teens can spend to how much you've put in the account. So you can’t be saddled with a big, unexpected bill.
The UPside Visa cards allow you to load and reload the card in amounts as small as $25 at no charge from a checking account or with a $2.50 fee if you transfer it from a credit card.
The UPside Clear has no annual fee, but it also offers no ATM access and a $1,000 maximum balance. Plus, you’ll have to pay a $2.50 fee for each direct deposit from an employer.
The UPside Access ($2.99 per month) and UPside Edge ($29.95 per year) have membership fees but more bells and whistles.
All cards offer instant access to account information online so you can monitor their purchases virtually as they occur.
When you hand over the card, make it clear that the money that's on it is all they are getting.
Maybe it's $30 for the weekend, $125 for the month or a few hundred dollars per semester.
Whatever the amount, they'll learn some valuable budgeting skills and think every time they swipe that card.
Most importantly, they’ll learn that plastic has limitations and consequences.
Step 3. Graduate them to a checking and savings account with a debit card.
Make the move when your teen gets his or her first part-time job.
Insist that their paychecks go directly into the account so that now they're spending their money -- or mostly their money.
The balance in the account will still serve as a strict limit on how much they can spend. Make them decline the bank’s overdraft protection so they don’t get whacked with $25 overdraft fees.
Get them in the habit of going online every few days to check their balance and look for fraudulent purchases.
Step 4. Take the training wheels off, and get them a real credit card.
It's relatively easy to make your teen an approved user on one of your existing credit cards.
But a better idea is to take out a new credit card with your teen as the primary cardholder and you as the cosigner. Just follow our advice for carrying the cheapest credit card possible.
This creates an account that can be used exclusively by your teen, allows you to insist on a relatively low credit limit and puts the responsibility for dealing with the monthly bill squarely on your kid's shoulders.
Tell him or her that that you expect the bill to be paid on time, in full, every month, and then follow the account online to make sure they're following those rules.
As a cosigner, you are still responsible for any debts your teen runs up.
If you see that they're overspending, missing payment deadlines or starting to accumulate a costly balance, it's time for another talk about savvy money management.
After the account has been open for about a year, have your teen order free copies of the credit reports from AnnualCreditReport.com to make sure their payments are being properly reported.
Show them how what they do goes on a record that's seen by everyone -- from banks to potential employers.