Raising Money-Wise Kids: What Your Kids Need to Know About Credit

Welcome to Schwab

Investment Products

Research & Strategies

Advice & Retirement

Banking & Lending

Markets Stocks Mutual Funds ETFs Bonds & Fixed Income Market Insight Portfolio Management

Ask Carrie

Charles Schwab & Co., Inc.

Call us at 866-232-9890

Send us an email

Printer-friendly
Type Size: A A A
Email to a friend
Subscribe

Ask Carrie: Carrie Schwab Pomerantz - The Personal Side of Money

Raising Money-Wise Kids: A Special Five-Part Series
What Your Kids Need to Know About Credit
by Carrie Schwab-Pomerantz, CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
April 20, 2006

My 18-year-old daughter wants a credit card because "all her friends have one," but I'm not so sure it's a good idea. What are the pros and cons of the situation?
—A Reader

Dear Reader,

People who follow my column and know of my devotion to thrift and saving may be surprised by my answer: Encourage her to get the card. Teach her how to use it responsibly. And drive the lesson home by making her pay the bill.

In other words, she shouldn't get the card to enable her to spend more, or for convenience, or because she feels underprivileged compared to her peers. Rather, she should get it to learn about the use—and misuse—of credit cards. There's also another practical reason: It can be invaluable in case of an emergency.

Introducing teens to credit

Most financial institutions don't offer credit cards to anyone younger than 18. But there are several ways to help your teen establish good financial habits while they're still under your roof:

Consider making your teen an "authorized user" of your credit card, and establish clear parameters about how and when she can use the card. (An authorized user can often be younger than 18, depending on the bank.)
Link a debit card to her savings account, and show her how to track expenses and reconcile her statement each month.
If she has had trouble managing money in the past, you might suggest she start with a "secured" credit card, which requires a cash deposit that is used as the credit line for the account. For example, if she puts $300 into the account, she can't charge more than $300. If she goes with this choice, however, help her shop around for the best deal since banks often charge outrageous fees and penalties on these types of cards.

Establishing good financial habits

Before you send her out armed with her new card, you should have a chat about these topics:

Remind her that when she uses a credit card she is borrowing money, which must be paid back, with interest if a balance is carried forward. It sounds obvious, I know, but kids today have probably seen more transactions done by card than with cash: Some of them don't realize what's actually involved.
Lay down the ground rules about paying the bill: The balance should be paid in full before the grace period ends. Show her the fine print in the cardholder's agreement about finance charges and late fees, and explain about the dangers of compound interest. And if, because of some unforeseen expense, she has to carry a balance, make sure she pays more than the minimum payment. The goal should be to eliminate that balance as quickly as possible.
Talk with her about budgeting, another skill she'll need as she makes her way into adulthood. Tell her to keep a journal of her expenses and her "income" for a month and help her plan for future purchases. Don't forget to include a savings component in her budget, and encourage her to save at least 10% of her income. (You'll find a spending tracker, tips on saving, and other tools on Schwab's Raising Money-Wise Kids Web site.)

Finally, explain why you're supporting this decision: to help her learn about credit and to help her build her own good credit rating. Encourage her to get her credit report and review it with her, and advise her to continue checking her credit report every year or so throughout her life. All major credit bureaus are required to provide consumers with one free credit report each year. You can request your credit report through this Web site: https://www.annualcreditreport.com/cra/index.jsp.

Many personal finance gurus urge people to "tear up the credit cards!" But credit cards, for most of us, are a necessity of modern life. The sooner our children learn how to use credit responsibly, the better.

To learn more about Raising Money-Wise Kids, view my recent webcast on schwab.com.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, you should consider a consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.

(0406-6264)

Return to Top

Ask Carrie your question about the personal side of money here:

Carrie cannot respond to you directly, but will include questions of general appeal in her weekly column. If you would like a Schwab representative to contact you about your personal situation, be sure to include your name and phone number, or email address.

Was this column useful to you?
YesNo

This is not a secure channel. For information about your account at Schwab, please log in to the secure channel of the Schwab Customer Center. Or, call 866-645-4117.

By clicking on “submit,” I hereby agree and consent that Charles Schwab & Co. Inc. may, but is not obligated to, use, publish, display, and/or exhibit all or part of my question, along with my first name, in connection with this column or for any other lawful purpose.

We respect your privacy. By submitting the information above, you consent to Schwab using the information you provide to communicate with you and to provide information about products and services. Please read more about online privacy at Schwab.