My precious daughter is going to study abroad for a year. She's 17. What should we do for banking and credit? – Bill
Ah, I can imagine this is a bittersweet experience for you — when you, as a parent, wonder if your child is ready to tackle the financial demands of being on her own for the very first time. While you can't know for sure, there is much you can do to help her prepare for her journey. She may not be a money and credit management master right away, but with some guidance, she can hop over some of the nastier bumps in the road — no matter where it is on the map.
Here are the three most important personal finance tasks you can help her with now:
1. Open checking and savings accounts in her name.
It is essential that your daughter form a healthy relationship with a bank or credit union before she leaves home. After all, they may be the first to grant her a personal loan or line of credit later.
Assist her with opening a checking and savings account at a financial institution that has branches in the country in which she'll be living or one that partners with a financial institution there. Because she's a minor, they'll be custodial accounts, but when she's 18 they can be transferred to her name entirely. She'll be using the accounts to deposit and withdraw funds, so explain how to check balances and monitor statements. Because she'll be given a debit card, give a tutorial on how to avoid expensive overdraft fees, foreign transaction fees and ATM fees.
Encourage your daughter to keep a base amount in savings and to contribute to the account regularly, too, even when cash is tight. Just a few bucks set aside every month is enough to establish a good habit. Even if you are the one funding the account and she is not working, it's important that she learn how to fund a savings account for little splurges or a real emergency.
2. Develop a spending plan.
Your daughter should know exactly how much money she has coming in each month or term and how to delegate those funds so she doesn't run short. Research the cost of expenses that she'll have to pay for, such as basic food and transportation costs. Together (and on paper), develop a budget so she can meet those expenditures. Chances are she'll go overboard some months, so you also need to determine when you will and won't step in to cover the difference.
Also make sure that your daughter understands that she may have less to work with than some other kids in her program. She may have to choose the cheapest brand of bread or opt out of a fun night. Those can be hard realities to accept.
3. Make her an authorized user on your credit card.
Because your daughter is under the age of 18, she's not old enough to sign a contract and won't be able to get a credit card on her own. However, you can probably add her to your account as an authorized user. If you believe that she's trustworthy and ready for the responsibility of managing plastic, consider it. Because she'll be overseas, it's smart for her to have access to a line of credit in case she needs to charge necessary or emergency items and services.
As an authorized user, all of the activity for that account will appear on her credit report as well as yours. If the balances are kept low and payments are always made on time, all reports and scores involved will benefit. She won't have legal responsibility to the issuer for payment, but you will, so lay down the rules. Monitor the account and address any problems that might occur immediately. Don't worry, you can always revoke her user status if she charges a trip to Ibiza without your permission.
Finally, maintain an open line of communication, so your daughter feels comfortable asking you for financial advice and telling you when she's broke or has made a mistake. I was that kid, eking it out in a foreign land, trying to make ends meet while also having fun. It was a tough balance. I can assure you, a surprise $20 from dad can make quite a difference. Reward good behavior and a solid effort when you can!
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