Teens directly command $75 billion of discretionary spending, says Piper Jaffray, an investment banking firm that studies youth spending in fashion, beauty and personal care, digital media, food, gaming and entertainment. Largely as a result of the 2008 recession, teens have become budget-conscious value seekers, according to the banking firm.
However, a vast majority of teens, 84 percent, say they look to their parents for information about how to manage money, says a 2015 Junior Achievement survey. A TD Ameritrade survey of Gen Z (ages 15 to 24), found similar results, but also noted credit card debt increasing with age as young credit users failed to pay off balances each month.
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A Capital One survey in 2012 said that 1 in 4 teens didn’t know the difference between a debit card and credit card.
Understanding and managing credit is important because a stellar credit history is important. As adults know all too well, what’s in a credit report can influence everything from the ability to buy a house to getting a job.
These six steps will help convert your teen from credit novice to pro.
This is the first step to putting them on the right path, but many parents say it’s harder than the birds-and-bees conversation. The Junior Achievement study found nearly 9 in 10 (89 percent) parents say their children learn about money from them. Yet when asked about their philosophy for handling the family’s finances, more than 1 in 3 parents said they do not discuss money with their children and “let the kids be kids.”
The best advice from experts: Keep it simple. Don’t overwhelm your teen with too much information at first. Just stick to the basics, like the difference between a credit and debit card. Free guidance is available online. Consumer Action offers an online guide to talking about money; and MyCreditUnion.gov offers an interactive learning game. The California Department of Consumer Affairs offers the FDIC money management guide for youths. The Consumer Finance Protection Bureau also offers a free online “Money Smart” guide for parents to use when talking to their high school students.
A prepaid debit card will give your teen low-risk experience using plastic, because the max they can spend is what’s loaded on the card. The downside? Fees to maintain the account. They also don’t report the user’s spending activity to credit bureaus, which means your teen doesn’t build a credit history.
Work with your teen to create a budget. It doesn’t need to be complicated, a simple budget that includes money they have coming in and expenses will do the trick. But make sure they track their expenses, including cash, and compare what they budget with what they actually spend every week or month.
If you can instill the habit of tracking income and expenses, you’ve given them a skill that will serve them well for life.
Many banks and credit unions offer what’s called “minor” or “student” checking accounts that often have lower fees than standard accounts. By opening a basic account with checks, your teen will get accustomed to making deposits and reconciling their account. You can add a debit card tied to the account when you feel they’re ready.
When you open a checking account for your teen, you have the option to either be a co-signer or let them go it alone. Co-signing will provide the opportunity to better monitor the account, but you’ll be responsible if your child overdraws and can’t pay the fees that result. Ask if your bank offers overdraft protection through a linked savings account or credit card.
Not all banks offer accounts to minors. Be sure to check with local credit unions as well, many encourage young savers.
Once teens prove their skills with checking accounts and debit cards, it’s time for credit cards, which will help teens build credit. Because of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, aka the CARD Act, those younger than 21 can’t get a credit card without either their own source of income or a co-signer. So if your teen doesn’t have a job, you’ll need to co-sign their application, which essentially is opening a joint account. Another possibility is to add your teen to your existing credit card as an authorized user.
Keep in mind that with a joint credit account, both you and your teen are responsible for the bill. If you add them as an authorized user on your card, you’re fully responsible for the bill. Both methods can help your teen establish a credit history, but because they’re personally liable, a joint account carries more weight with lenders and will better help them qualify for their own credit.
If you want your teen to have their own plastic but are worried they may mess up their credit or yours, you could open a joint secured card. With a secured credit card, the available credit on the card is limited by the amount of security deposit you put down.
Like the secured debit card, it’ll prevent overspending – and often carry higher fees than traditional cards. But secured credit cards still help build credit. For tips on opening a secured credit card with a decent rate, check out Upfront Credit Card Fees? Here’s a Better Option.
When that credit starts accumulating, don’t forget this step: Show them how to track their credit history by pulling a free report at annualcreditreport.com.
If you want your kids to stay off drugs, you probably don’t smoke pot in front of them. The same logic applies here. Kids learn from their parents, so if you want your kids to be good financial stewards, be one yourself. Stress the importance of a good credit history by having one. Show them how important it is to pay bills on time by doing it.
And if you want your kids to piggyback on your credit by being an authorized user or co-signing for a credit card, remember it’s a double-edged sword. Your good credit can help your offspring establish their own, but if you miss payments on the card you hold jointly or on which they’re authorized, you’re hurting their credit. Not a good way to start out in life.
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Courtesy of MSN