How to Teach Teens About Credit

by Emily Guy Birken · 13 comments

Teenager with credit card

You wouldn’t let your teenager cruise around solo before he’s had some driving lessons, would you? It’s pretty obvious that the responsibility of driving is something that requires education, practice, and time.

But many parents are allowing their teens to take on another important responsibility without the benefit of an education. Specifically, many young people get their first credit card without any idea of how to manage it. This can have disastrous results.

Rather than letting your teenager navigate the potentially treacherous waters of credit by himself, start providing him with age-appropriate lessons early on.

Here’s how to help prepare your teen for the responsibility of owning a credit card:

For Young Teens and Those Who Need More Structure

Getting a prepaid debit card for your child can be a good first step in helping them to understand credit. The upside of a prepaid card is that it makes it impossible for the child to get into trouble — once the money is depleted, the card is declined.

In addition, this can be a good way to introduce young teens (those under 15) to the intricacies of non-cash budgeting. Since many banks won’t offer checking accounts to kids under a certain age, this is another way to help kids figure out how to budget their allowance (which you load onto their card).

One downside to prepaid cards is the number of fees for maintenance and usage. Be sure to shop around to find the best prepaid card. All of them have some fees, but there are many that keep them reasonable.

For Teens with Jobs

Opening a checking account is an important step to financial maturity, and one that teens can handle with their parents’ help. Many banks offer student or minor accounts that have lower fees than their grown-up counterparts.

When your teen opens his account, he’ll learn how to deposit paychecks, balance his checkbook, and maintain a necessary balance. When you feel that he’s ready for the responsibility, you can add a debit card to the checking account, which will again give him an opportunity to learn how to pay, budget, and handle non-cash transactions without leaving him vulnerable.

Depending on your child, you may want to be a co-signer on their checking account, or you may want him to go it alone. While being a co-signer gives you more oversight on what’s happening with the account, it also makes you ultimately responsible for any fees he accrues.

For Older Teens and College Students

Once your teenager has proven himself capable of handling a prepaid card and a checking account, he’s ready to move on to a credit card. Until he turns 21, he can’t get a card on his own without either a co-signer or proof of income, so you can either open a joint card with him, or you can add him as an authorized user to your credit card.

Having him as an authorized user does less to build his credit history, and it also means that you’re responsible for the credit card bill. A joint account means that you’re equally responsible for the charges — and it’ll help him to establish his credit.

The Bottom Line

Learning how to responsibly use credit is not always an easy process. Many people find that they need to make mistakes and learn from them before they truly understand what to do. You can make that learning curve shorter (and less painful) for your teen by introducing the skills associated with credit cards over several years.

How have you helped your teens learn about credit cards?

Btw, there's a pretty nifty tool that motivates your kids to do chores. It's called MyJobChart.com. With a free account, they can earn points for finishing jobs you assign them, good towards free merchandise. Give it a try. It's completely free!

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{ 13 comments… read them below or add one }

Jean-Paul Gauthier February 15, 2013 at 5:26 am

I appreciate the idea behind the post – we as parents should be teaching / guiding our kids through aspects of personal money management. I think the main reason why we don’t is because so many parents haven’t got it figured out for themselves. Better that we should lead by example, get our own financial house in order, talk openly with our kids about money. Show them the bills we pay, get them involved in little things like doing the grocery shopping and letting them manage the budgeted amount being spent. And lead the way as a parent that doesn’t use credit cards – period. Our grandparents believed buying on credit was dumb but in less than a century we’ve adopted a philosophy that we can’t live without credit cards. We need to wake up as a society and teach our kids the better way – save up for what you want and pay cash.

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KM February 15, 2013 at 11:21 am

I agree with you about being open with kids about money – that’s how I learned to be responsible, by watching my mom calculate a budget and see what we can afford. However, I don’t necessarily agree with your strict philosophy on credit cards. Credit, yes, but not credit cards. I have my card so I can get rewards and pay in full every month. That might be more difficult to explain to kids, but I think it can’t be bad to use credit cards in general if you use them responsibly and still stay within your budget. I have a spreadsheet that tracks all my purchases so I can see how much we spend each month on what items and what we have left, which, as the post suggests, can be turned over to a teenager at some point (I did the same thing to my husband to curb his spending).

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KM February 15, 2013 at 11:46 am

I don’t know what kind of banks you use, but I have never had fees for a checking account that gave me a debit card (which I presume is what you mean by a prepaid card). I have had an account (jointly with my parents at first) since I was around 13 and it was checks only at first, then a card, but it might be different now.

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Sharon February 17, 2013 at 9:44 pm

You don’t need a checking account to have a pre-paid debit card. They work the same as gift cards, but they have the user’s name embossed like a credit/debit card. Many of them have fees, but there are some issued for no charge, usually when the parent has an active account.

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Chris @ StockMonkeys.com February 15, 2013 at 12:49 pm

I couldn’t agree with your article more. Parents who cloister their kids and don’t talk about money and the family finances do their children a disservice. How many young adults have horrible finances because they didn’t know the basics about budgeting and money management.

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Storm February 15, 2013 at 1:07 pm

While I teach my kid about finances and budgets using YNAB, I will never ever suggest she gets a credit card. This way lies foolishness. While one poster apparently can manage it, MOST people cannot. So I tell (AND SHOW) my kid, save up for the things you need. And occasionally, for something you want. The rest, start a retirement account while you are young and save save save. Maybe she will be able to have a much easier retirement than I will have.

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Dona Collins February 15, 2013 at 6:47 pm

I read an article the other day that talked about whether or not the government should mandate that college students take a personal finance course as part of their general course requirements (much like they have to take writing or math courses). This article has me thinking, again, about when personal finance courses should be required. There is very little done at the high school level, and those leaving high school and entering college are usually the ones who make the most mistakes – getting to college and having to handle their own finances with very little help.

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Property Marbella February 16, 2013 at 2:33 am

My teenagers had credit cards with limited withdrawals per day, per week and per month. There were a lot of problems in the beginning but they learned very quickly how to manage a credit card.

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Michael February 16, 2013 at 7:32 pm

This is a great idea. How did you manage to get it set-up that way? Or if you don’t mind sharing, what credit card company did this?

Thanks

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Jonathan February 16, 2013 at 8:06 am

A prepaid credit card is a great idea, however in my experience it only works if you partially link it to their pocket money. There has to be some link to how their spending effects their OWN personal finances, otherwise they are simply spending parents money without little regard.

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James Darumer February 18, 2013 at 3:23 am

I wish I’d had this sort of education when I first got a credit card. At that age, when you’re so naive to the ways of the world, it genuinely feels like free money. Before I knew it I was on the hook for almost a thousand pounds, debt which was really hard to shift when I approached it sensibly.

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Shane February 18, 2013 at 2:04 pm

I am glad you went over this. I had friends growing up who’s parents let them run wild on their credit cards, and I wondered if they ever really learned the value of a dollar.

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Robert February 22, 2013 at 5:48 am

People who join the US military are covered by the Soldiers’ and Sailors’ Civil Relief Act of 1940. Besides other protections, it requires lenders to reduce interest rates to 6% while the service member is in the military, if the credit was established prior to the person joining the military. I agree that credit card balances should be paid each month, but for those who do carry a balance, paying 6% is much better than paying 26%.

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