If there is one trap that virtually every young adult seems to fall into and that sometimes might even require a rescue from mom or dad, it's credit card debt. The ease with which credit cards allow people to buy now and figure it out later, combined with an overwhelming marketing push aimed at younger consumers, has led to an epidemic of maxed out 20-somethings. In fact, according to Nellie Mae (a division of the student loan organization Sallie Mae), the average undergraduate college student is carrying $2,169 in credit card debt. Even worse, the average graduate student is carrying a whopping $8,162 balance.
SEE: The Generational Debt Gap
While some parents may take a "live and learn" attitude, for many, their children's credit card mistakes can become a financial weight around their own necks. Whether it's a recent graduates whose first job won't cover the monthly payments or the soon-to-be married child whose credit score is keeping is making buying a first home next to impossible, many parents feel the domino effect of their children's poor decisions. Fortunately, it is still possible to teach your children good credit habits. Read on to find out how.
Do Kids Need Credit?
There are a few reasons that most parents will agree to get their kids some plastic, they include:
The biggest reason most parents will help their children with a first credit card is the desire to help them "build credit." While establishing a credit history is a valid reason, it's definitely not the most important reason. Credit scores are far less dependent (only 15% of the total score) on how long someone has used credit. In reality, most people who get a credit card with the intent of building credit end up doing far more damage to their score by using the card irresponsibly. If you're going to help your children build credit, you'll want to put just as much effort into helping them build good habits.
Creating Healthy Habits
Teaching your children good habits and a healthy mindset with their credit cards while your children are still in a position to listen is the single biggest reason to get them a card while they're still under your roof. The vast majority of people who find themselves overwhelmed with debt got there one irrationalized purchase at a time. As a parent, working with your children to differentiate between needs and wants will go a long way toward keeping them out of trouble.
Avoiding Impulse Purchases
By examining your children's monthly purchases and processing the rationale behind each one, you can help your kids gain insight into the impulsive thinking that can lead to spending more than they can afford. Likewise, by enforcing timely payments of the entire month's charges, you'll be teaching your kids about money, and it will help them to avoid the two things that can hurt their credit score the most: high balances and late payments.
Providing a Safety Net
Of course, good credit habits are behaviors we hope our children will choose on their own, but part of being a young adult is making the occasional mistake and learning from it. Unfortunately, each "learning opportunity" stays on a credit reports for seven years. Thus, the last reason to get your children their first credit card while they are still under your financial roof is for you to be able to provide a safety net. By being able to watch over their shoulders, you'll be sure the dog doesn't eat their payment, they don't get duped into wasteful monthly charges and identity thieves don't hit the jackpot.
The Best Type of Credit Cards for Your Kids
The best time to put a card in your children's wallets is in high school; however, instead of a credit card, start them with a debit card that deducts the money directly from a bank account. Whether it's weekly allowance or a paycheck from their first jobs, they'll get used to the responsibility of carrying a card and not buying more than they can afford to pay for. To avoid overdraft fees, consider using an account that offers overdraft protection or help them with a system to track their spending as they go.
Once your kids start driving, and no later than college, get them their first gas credit card. More likely than not, the card will have to be in your name. However, just having a gas card will allow them to get their feet wet with true credit without the temptation or ability to go off the deep end. Also, because most gas stations now offer mini-marts, it gives them the ability to make small purchases that they'll still be required to budget and account for at the end of the month.
After high school graduation, consider getting your children their first true credit cards. Ideally, the credit cards should have a low limit (maximum of around $500), a low interest rate and a low (or no) annual fee. To ensure that your children qualify for the credit card, as well as to help them truly build credit, consider opening a new joint credit card account with your child. Simply adding the child to your existing credit card (also known as "piggybacking") no longer helps an individual to build a credit history.
If your child is going to go off to college or moving to a different town, consider also getting him or her a family "emergency card." This is a card that can be safely tucked away in case of a true emergency. By having a family card that that your child is absolutely prohibited from using for non-emergencies, you remove any excuse he or she might have for getting a card of their own.
When it comes to choosing the actual card, have your child do the research and discuss it with you. Learning to be an informed consumer, especially in the area of credit, is a skill most people never learn. By having your child research the details of each available card - from the rewards to the fine print - your child will learn to never just "sign on the dotted line."
Credit Card Pitfalls to Avoid
One of the biggest mistakes many parents make with their children is not sharing their own mistakes at the appropriate time. The fear of course, is that admitting your own mistakes will give your children permission to make the same mistakes. Parenting history proves this idea wrong, as most children invariably have to learn most lessons for themselves. With credit cards, your best bet in helping your children to use them wisely is to tell them about the times you didn't. Explain to them how you got into debt, share with them how you felt in the middle of it all, and tell them how long and how hard it was for you to eventually get out of it.
Another key mistake many parents make is not helping their children understand credit card interest rates. Most kids - and many adults for that matter - have no idea how fast compound interest can double a credit card balance or how a lower credit score affects the future cost of borrowing. To help your children learn this, have them spend some time on the internet doing research on these topics. Make it a prerequisite for getting a credit card. Chances are you'll learn something too!
The Financial Finish Line
One of the biggest reasons parents choose to help their kids learn to properly use credit is to help them "launch" financially, once and for all. With that in mind, you'll need to have a "finish line" in mind for letting your child handle credit independently. Failure to do so can result in an over-dependence on you as a source of financial stability.
As a general rule, the end of college (approximately 21-22 years old) is the ideal age to cut credit ties with your kids. Be sure to let them know the plan a year ahead of time so they're not frustrated or confused by it when it happens. At that point, after years of allowing your kids to have increasing responsibility and providing them with important accountability and dialogue, they should be ready to successfully manage credit on their own.