Credit cards are a part of life for many kids these days, at increasingly younger ages. Some parents get their child a credit card or prepaid card early on, but even if you don’t, once junior heads off the college, it’s only a matter of time before he or she will land their own personal piece of plastic.
And, while parents might well assume that their kids would graduate from high school with some basic financial literacy skills, this is for the most part not the case. According to the Jump$tart Coalition for Personal Financial Literacy, the average high school graduate lacks basic financial management skills, such as how to keep a balanced budget.
Without proper preparation, it is all too easy for young adults who head off to college to get tempted by the lure of the seemingly free money offered by student credit cards. Credit card debt among college students has been steadily on the rise, according to student lender Sallie Mae, ranging from $2,038 for freshmen to $4,138 for seniors in 2008.
In short, educating children about financial management in general and credit cards in particular remains the responsibility of parents. Kids need to learn how to use credit cards as much as they need to learn how to drive. Here are eight tips to help your child develop financial management skills early on
1. Start early. The process of teaching your kid how to balance income and expenses starts early. Giving your child a weekly allowance is crucial to a child’s ability to learn to manage money. Start out with a cash allowance for kids under ten. For teens and even tweens, getting a prepaid credit card can be a good way to introduce your child to the temptations of plastic, while forcing him or her to budget expenses to stay within the allowance loaded on the plastic each month.
Many prepaid credit cards now cater to teens and offer the convenience of credit cards at a reasonable cost. Alternatively, load the allowance on a debit card and have your kid use that.
2. Budgeting is an acquired taste. Keeping track of expenses and making sure one keeps spending within means is the most important financial management skill you can teach your child. Knowing what one can spend and sticking to a budget is a challenge even for adults. Have your tween or teen keep track of all purchases and subtract it from the balance left on their prepaid card or debit card. This establishes a crucial habit of keeping track of spending on plastic.
3. Space allowances further and further apart. The longer between allowances, the greater the self control needed to not burn through all the money in the account. As your teen or tween master weekly allowance payments, spread allowances two weeks, and then a month apart. Consider giving your child a 10-20 percent bonus allowance payment if they still have money left in the account when the next allowance payment comes due.
4. Teach the value of money. Give your children jobs around the house to enable them to earn money to supplement their allowance. Nothing makes someone appreciate the value of money as having to earn it oneself.
5. Set savings goals. There are many big-ticket must-have items in kids’ lives these days. Instead of simply buying such items as presents, give your child the experience of saving up for something one wants. Show your kid how much he or she would need to put aside each month to buy the item desired in, say, three months. Consider making a matching contribution to reward good savings behavior.
6. Educate, educate, educate. Having to manage one’s own finances is never easy and certainly not as desirable as simply sweet-talking mom and dad to dip into their pockets. Your kids will make mistakes, slip-ups, get frustrated and angry. This is a part of the process, and the more you’re able to talk with your teen and tween and help them get a perspective on how to manage desires within the context of their means (even in the face of group pressure), the better off they will be as adults.
7. Graduate to a credit card before college. As your child gets close to college age, it’s time to get him or her a credit card, preferably as an additional accountholder on your credit card. Student credit cards are a ubiquitous part of student life, and you’re better off having your kid get a credit card while you’re still in a position to keep an eye on charges and talk to him or her about credit card management.
8. Outline the big picture. Talk to your teen about the temptations of credit card usage and outline the bigger picture of what it means to manage credit cards wisely. Teach your young adult about the importance of a good credit history, and how bad credit can thwart one’s efforts to buy a car or even get a job.