Did you know that the average undergraduate student carries $3,173 in credit card debt?
Even scarier, only 45% of teens know how to use a credit card. As parents, it’s really important to make sure that your child doesn't contribute to these frightening statistics. Kids need to know how to build a solid credit history, and their teenage years are an opportune time to instill good financial habits.
In fact, helping them get their first card around 18 is a good idea, since it can help kids build up their credit histories early. Here’s how to do it.
1. Have a heart-to-heart conversation.
According to a survey by ING Direct and Capital One, only 26% of parents are ready to talk to their kids about money, and many think the “money talk” is even harder than the birds-and-bees conversation. But preparing your child to use a credit card shouldn’t be too hard—just make sure to cover these topics:
- Impulse shopping: Studies have shown that people spend much more with a credit card than with cash. Teach your kid to avoid impulse purchases by having her only use her credit cad for planned purchases you've approved, and teach her to think before she swipes. You should also examine her monthly purchases together and have her explain the why behind each one.
- How credit scores are calculated: Your child won’t understand how his credit card use affects his credit health without first knowing how credit scores are calculated. Use Credit Karma’s Credit Report Card to show him what factors make up a score—and explain why it's important, since it will affect later purchases in life, like a car or a home.
- How credit card interest rates work: Show how quickly interest rates add up with an example like the following: “If you buy a camera for $350 on a credit card that charges 19% interest, and pay just the $15 minimum on your bill, at that rate, it’ll take you 30 months to pay it off, and will end up costing you $440 when you add in the interest payments.” A timely math lesson can go far in convincing your child not to charge more than she can pay off in a month.
- Security: Tell him not to give his credit card number out to untrustworthy sources and to memorize passwords and PIN numbers so there’s no written record of them.
- Your own money mistakes: If you’ve made financial mistakes with credit or debt in the past, share the most instructive ones. Talk about your experiences with debt and explain that negative credit report information follows you for seven years, making it hard to rebuild your credit. (And if you don't have any money mistakes, talk about these top credit mistakes to avoid.)
Of course, not all kids are the same, so tailor your talk to address your child’s specific strengths and weaknesses. And keep in mind this list is not exhaustive—there are plenty of other lessons you can cover.
2. Do your research together.
Now that you’ve had “the talk” with your child, it’s time to apply for a credit card. Go through the entire process together so she can learn how to do it on her own in the future.
Here are some options to consider for your child’s first credit card:
- Secured credit cards require you to make a security deposit, which is then set as the credit limit (minus processing fees). This helps remove the risk of default for the issuer and overspending for the cardholder. It’s a great “practice” credit card before an unsecured credit card that doesn’t require a cash deposit. If you and your child go with this option, make sure that the company reports the secured card to the credit bureaus, so it will go on your child’s credit history and improve her score. (Find out more about credit scores here.)
- Student credit cards are especially designed for young cardholders. They often have lower credit limits and higher rates, but also have higher acceptance rates. Look for one without annual fees and as low of an interest rate as possible. Be wary about credit cards specifically directed at college students. They may offer fun promotional offers and rewards for students with good GPAs who pay their bills on time, but they also usually have higher interest rates. If your child keeps a balance on her account, the rewards could soon be offset by the interest she’ll have to pay. Just keep in mind that the best credit card for your child may not necessarily have the word “student” in the title. Take the time to look around for the best deal available.
- Prepaid debit cards allow you to load a pre-deposited amount of money onto your card and charge purchases just like a credit card until the money is depleted, preventing your child from going over her credit limit. But keep in mind that prepaid debit cards don’t report to the three major credit bureaus, so it won’t help your child build her credit history and score.
While looking for credit cards …
- Look at the fees, interest rates and charges associated with each card. Avoid cards with excessive fees.
- Check out credit card reviews.
- Talk with a representative at your personal bank to find out what it offers teens. You might find a deal that you wouldn’t find online, plus, bank representatives may have more authority than automated systems to get applications approved.
- Shop for a credit card with a credit union. The rates and terms may be more customer-friendly than what larger banks and card companies offer.
Keep in mind that anyone younger than 21 needs to either have a co-signer or verifiable income that proves she has the means to repay the credit.
3. Follow up to make sure he’s developed good habits.
After your child has his first credit card, follow up with him to make sure he’s using it responsibly. See how he’s doing with:
- Paying the card in full every month. This should be done as much as possible to avoid paying interest on purchases and getting into debt.
- Paying the card on time. Payment history has a huge impact on one’s credit score. Late payments can stay on credit reports for seven years, so it’s imperative that your child makes every payment on time.
- Budgeting. If you haven’t already, work with your child to create a realistic budget. Make sure she tracks expenses, including cash, and compare what was budgeted with what was actually spent every week.
Given how many people fall into debt, it’s best to have your child learn how to manage credit under your supervision. Though it’s not always easy to talk about money with your child, doing so will help him succeed in the future.
Jenna Lee writes for CreditKarma.com, which provides more than 11 million members free financial peace of mind by tracking their credit and finances all in one place. Find Jenna on Twitter.