All parents want to educate and trust that their teenagers will make healthy financial decisions in the future. With more than half of American adults carrying nearly $10,000 in credit card debt, and with total U.S. consumer credit card debt fast approaching $1 trillion, educating teens on finances has never been more important. The Better Business Bureau (BBB) has advice on how to help teens toward financial independence.
The first step to get your teens on their way to financial independence is to set up savings and checking accounts. This will teach them how to manage spending and better understand the importance of saving money. Once teens have proven they can budget, control spending, pay debts and save, they’re ready to graduate to the world of “plastic money.”
Debit cards have proven to be enormously popular with students and younger workers who make up what marketers are referring to as “Generation Plastic.” In 2006, credit/debit card companies reported hundreds of billions of dollars spent via debit card transactions, and many also reported double digit increases in demand for debit cards among teens.
A debit card is a good way to teach your teen the value of monitoring an account balance and their spending habits. Unfortunately, having a debit card means teens could run the risk of overdrawing the account. The most recent study from the Center for Responsible Lending notes that debit and ATM cards accounted for nearly half of the more than $10 billion in overdraft loan fees levied against consumers in 2005.
And, if the card is ever stolen, teens might have a difficult time getting the money back since debit cards do not generally carry the same liability protections as credit cards. Debit card liability varies. Like credit cards, in some cases loss may be limited to $50 if the card owner notifies the issuing institution within two business days of loss or theft, but notification after the initial 48-hour window can leave teens liable for as much as $500 for illicit use.
An alternative option to a debit card for teens is a pre-paid card, which operates much like a store gift card but can be used anywhere credit cards are taken. The best part about the pre-paid card is that parents can manage the amount of money available to the teen and don’t have to worry about an overdrawn bank account. The drawbacks to pre-paid cards are the amount of fees that get tacked on, so parents and teens will want to read the fine print.
There are many options available when teens are ready for a real credit card. Parents can set up a secured card that sets the credit limit based on the amount of money in the teen’s savings or checking account. Parents can also set up a joint credit card with both you and your teen liable for any debt. Or, you can simply set your teen up as an authorized user on your credit card. All options will help educate teens, with the last option allowing the teen to piggyback and benefit from your credit history.
Regardless of which option you choose, the BBB offers tips to help you guide your teen with their new debit, pre-paid or credit card:
Set the ground rules, including what the teen can and can’t purchase with their card.
Make sure they always pay off the card balance in full and on time – if you’re allowing your teen to piggyback as an authorized user on your card, you should still insist on their prompt repayment to you.
Explain the concept of interest rates, the importance of a good credit score, and the long-term consequences of failing to pay their bills.
Reconcile and discuss with your teen their credit card statement and spending habits every month.
Be firm that any debt is theirs to pay off. It is better for them to learn from their mistakes early while you’re there to guide them.
For more advice parents can trust on raising money-savvy teens, go to www.bbb.org.