By Ilana Polyak
Suzanne Sorel and her husband, Leo, have spent several years teaching their 17-year-old son Walter about the value of money. The New York City-based couple uses a system of three envelopes – Spend, Save and Share – and Walter has done well with them. He saved up for a new phone and donated to the Alzheimer's Association because his late grandmother was afflicted with the illness.
While Sorel is impressed with how Walter manages his allowance and babysitting money, she's less certain about how he'll do with a bigger financial challenge: credit cards.
"It would never occur to me to give a teenager a credit card," she says. The Sorels have already begun debating whether they should let him use their credit card for "emergencies" when he heads to college in the fall of 2016. For now, they're leaning toward sending him off to school with a debit card. "It's sort of like a credit card," Sorel says, "but he'll only be able to spend what he has in that account."
It's one of the agonies of being a parent: fretting about how your kids will handle money as they emerge into adulthood. While six out of 10 parents said in a 2013 Harris poll that they paid their children an allowance, instilling good credit habits in underage children will require a bit more effort. Here are some steps that can help teach your kids about credit.
We're moving toward a cashless society, and it's confusing for kids.
Jayne Pearl, author of "The Kids and Money Guide to Smart Spending"
Open Your Books
In a world where adults use cash less often, adolescents might be slow to develop a well-grounded sense of when to use credit and when it's better to stick with cash and debit cards.
"We're moving toward a cashless society, and it's confusing for kids," says Jayne Pearl, author of "The Kids and Money Guide to Smart Spending."
Pearl recommends talking to your children about why you use a credit card. Is it primarily a budgeting tool that lets you keep track of your spending, or do you prefer not to carry large amounts of cash? She suggests showing them your credit card bills, going through the terms of the accounts and explaining what it would mean if you only paid the minimum due each month.
Start With Savings
Signing your kids up for a savings account of their own can be a good starting point. This can help children understand banking transactions while establishing their early financial history. You'll need to co-sign any bank accounts for minors.
Next Step: Debit Cards
If your teenage kids prove they can handle a savings account, then it might be time to add a checking account with a debit card. They'll feel more like an adult each time they swipe their card at the store, but their spending will be limited to the funds available in their accounts. Some financial institutions offer special savings and checking accounts designed for children.
Make sure to impress upon your children the risk of a checking overdraft or the loss or theft of a debit card. Tell them to immediately report the loss of a card to their bank, and to never write down their PIN or share it with friends.
Getting Started With Credit
It is challenging for any student under 21 who doesn't have a full-time job to qualify for a credit card without a parent's co-signature. If you think your kids have shown they can handle credit responsibly, you might consider co-signing for a secured credit card with a low limit. If you put, say, $500 into this type of account, then they will only be able to charge up to $500. Because they will still need to make monthly payments, it's an ideal opportunity to help them build positive financial behaviors.
On the other hand, co-signing for an unsecured credit card while your child is in college has the potential to put your own credit rating on the line. "You have all of the risk, but none of the control because they're over 18," Pearl says. She recommends waiting until your child has built up a good enough credit history with a savings account, debit card and perhaps a secured credit card to qualify on his or her own.
You may also consider adding a child as an authorized user on one of your current credit cards; if you do, review the statement each month and discuss how and when it's the right time to use the card for purchases.
With these steps, you'll start a long-term conversation that informs your children's behavior and sets them on the path to building their own bright financial futures.
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Ilana Polyak has been a staff writer at Money Magazine, TheStreet.com and InvestmentNews. Her work has also appeared in The New York Times, Barron's, Kiplinger's Personal Finance, Bloomberg BusinessWeek and CNBC.com, where she is a frequent contributor.