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How to teach your children about credit cards -- before it's too late

Credit cards for kids. People either latch onto the idea or loathe it.

"It's appalling," says Ken McEldowney, executive director of Consumer Action, an advocacy and educational organization. "It's like saying, 'Hey, let's get you started going into debt early.' "

Wendy Weinberg, executive director of the National Association of Consumer Agency Administrators, agrees. "Consumer groups have generally been against marketing to college kids; the high school students is one step worse."

Plastic is a powerful tool
But another faction sees credit cards as a powerful tool, and thinks children should gain experience using them before they turn 18 and can obtain one without parental consent.

"Taking loans is an important skill," says Sharon Rich, financial planner and psychologist with Womoney in Belmont, Mass. "I don't think it's a bad idea for a child to have some responsibility for that."

The key to success is education. Parents must be vigilant and involved with teaching their youngsters financial basics.

"I think this product is right in certain families," says spokeswoman Diana Don of Capital One's "High School Credit Card," a co-signed MasterCard for 16- to 18-year-olds. "It may not be right for families who don't want to teach these skills. This is very important to understand."

Steps to take
Experts say parents should take several gradual financial steps before giving a kid a credit card.

• First, see to it that the child has a checking account. "Children first need to learn the basic skills of writing a check and tracking money," says Rich.
• After they have shown they can balance a checkbook, let them use a debit card, which looks and acts like a credit card but is tied to the checking account.
• When they have mastered those basics, apply for an extra credit card under your own account at a retail store or bank.
• Tell them how the card works -- starting with the connection between charging one month and paying the next. Emphasize that it's not free money unless the balance is paid in full before the grace period expires. Explain interest and how it compounds if a debt piles up. Look at the fine print and review other key terms such as late fees. Stress the importance of keeping the card safe, and what to do if it's stolen or lost.
• Set limits and monitor the child's usage. "See what happens when you tell them they can spend $100 on a wardrobe," says Rich. "Build up their level of responsibility."
• When you feel they are ready for a card in their name, encourage them to shop around for low rates and fees.
• Emphasize the importance of a good credit history and how a bad one can thwart their efforts to buy their first car or apartment. Show them how to get a copy of their credit report.
• Give the child responsibility for paying all or part of their balance from an allowance or job. "If the child isn't earning the money, a lot of the reality is lost," says consumer advocate Weinberg. "I don't think most people appreciate the value of money until they are sitting at a desk pulling in a paycheck."

 - Posted: May 8, 2000  -- Updated: March 21, 2007