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Can Your Kids Handle Credit Cards?

According to CNN Money, approximately three-quarters of all parents give their kids some form of an allowance, with the average allowance totaling $15 per week. Whether you give your kids an allowance or not, you can teach them good money handling habits now that will help them establish and maintain financial stability throughout their lives.

Can your kids handle credit cards responsibly? We’re not saying to hand over your VISA for them to practice on, but if they don’t learn how to manage credit now, when will they? With the state of financial literacy nowadays, teaching them about credit young is one of the most valuable money handling tools that you can provide for your child.

Establish a “Prepaid Credit” Account

Does your kid want the latest smartphone or tickets to see Katy Perry or Nicki Minaj? Instead of whipping out your own plastic, take a page from celebrities like JayZ and establish a “prepaid credit” account funded with money set aside by your child to finance the purchase. Many banking institutions have established “young savers” accounts which are ideal for this purpose.

If your child gets an allowance, calculate how much your child would need to save each week, then instruct your child to put aside part of his or her allowance each week to raise the “credit limit” until there is enough money saved to purchase the tickets or the gadget. Likewise, if your child has a part-time job, encourage him or her to save some money from each paycheck to accumulate a sufficient“credit limit” to buy the desired item.

If he or she doesn’t get an allowance and doesn’t work, designate certain tasks around the house that will allow him or her to earn money for the “prepaid account.” If your child is saving for something really big, like an overseas trip with his or her foreign language class, consider periodically matching his or her deposits with your own funds to boost the “credit limit” of the prepaid account as a form of encouragement for thrifty habits.

Move Up to a Debit Card

Once your child has become accustomed to saving money for the things he or she wants, allow your child to establish a Visa or Mastercard debit card checking account funded with money from an allowance or a part-time job. Shop around for banks and credit unions that offer free checking and debit cards with free ATM withdrawals. Stay away from real prepaid cards, because they often have high fees. Have your child opt out of overdraft options to prevent him or her from overdrawing the account. A few embarrassing incidents of having his or her debit card denied are much less painful than dealing with an account that is always hopelessly in the red.

Graduate to Credit Cards

Under the Credit Card Act of 2009, young people under the age of twenty-one must either provide proof of income or have a parent co-signer to apply for a credit card. As an alternative, you may add your teenager as an authorized user on your own credit account, with the understanding that your child will pay for his or her own purchases. If your child runs into financial problems with the credit card through no fault of his or her own, it’s OK to provide a helping hand. If your child has been irresponsible, you can still provide a bailout, but only with the understanding that you will hold onto the credit card until you become convinced that he or she will be more responsible in the future.

It’s Not Punishment

Do not force your child to save every penny of his or her allowance or paycheck or you will generate resentment instead of cooperation. Emphasize that the money your child does save still belongs exclusively to him or her. Whatever your child’s age, be prepared for complaints that Suzie’s or Jamal’s mom and dad don’t impose such strict limits on spending. Explain that you’re not punishing your child, but rather setting him or her up for a more prosperous future. You may not be the cool parents now, but chances are good that your kids will eventually appreciate your efforts by the time they head off to college, more likely sooner than later.

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