A while back, I participated in a televised call-in show about kids and money with members of the Jump$tart Coalition. In preparation, I posed questions to a group really talented, dedicated people from organizations like Young Americans Bank, The American Institute of Certified Public Accountants, and the Financial Planning Association. The result is one heck of a resource on kids and money with topics covering budgeting, credit, cars, school/college, and jobs. Yesterday, I covered kids and budgeting. Today, I’m going to share a some questions and answers about credit. (Disclaimer: not every answer will reflect the views of all participating organizations.)

How old do you have to be to get a credit card?

There is no specific age; however, creditors have their own policies regarding issuing credit to young adults. Most creditors will not issue a card to someone who is under the age of 18 because (in most states) they are not yet legally able to enter into a contract and cannot necessarily be held to the agreement. There are cards available to younger teens, but most require someone over the age of 18 to cosign. To learn your state’s laws, contact your local consumer protection office. To find yours, visit the Federal Citizen Information Center's website at ConsumerAction.gov.

Can a minor have a credit history?

Yes, if someone under the age of 18 has credit and their creditor reports to the credit bureaus, it is possible for them to have a credit history. Under the FACT Act, every consumer is entitled to one free copy of each of their three credit reports each year. To access these reports, visit AnnualCreditReport.com.

Can I keep them from getting a credit card?

No, I do not know of any way to prevent them getting a credit card. That is why it is so important that you educate your teen about the proper use of credit. For information on teaching teens about money, check out the National Endowment for Financial Education’s great publication titled Simple Steps to Raising a Money-Smart Child.

Should I list my teen as an authorized user on my credit cards?

This is an individual decision. As the primary card holder, you would be 100% responsible for changes made to the card. However, because you have control over the account, it is a safe alternative to cosigning. Just be aware that your teen might not benefit from your good payment history—ask the lender if they report to the authorize user’s credit files. Many do not.

Should I cosign for a credit card?

The decision to cosign a loan for someone or not comes down to this: Are you willing to pay the debt? If you are not willing to assume totally responsibility, you should not agree to sign for the loan. Consider a debit card as an alternative. Or, if your goal is to help your teen establish credit, they could get a secured or prepaid credit card instead (see next question).

How can they establish good credit?

The most important thing they can do is to pay their bills on time and as agreed. A secured credit card would be a good, safe way to prove they can do this. With a secured card, your teen makes a deposit into a savings account with a bank to secure a line of credit. The credit card company then issues them a card and a line of credit for at least the amount of their deposit. To get a list of major banks that issue secured credit cards, visit CardTrak.com.

Why do creditors market to teens?

While we cannot speak on behalf of all creditors, it is probably safe to say that they want their future business. In fact, some studies show that students switch cards less often than the general public and they tend to remain loyal to the company that issued them their first card.

What is the difference between a debit card, credit card & secured card?

Debit cards are not actually credit cards. Debit cards are offered by financial institutions to making banking simpler. When you use a debit card, the money is automatically deducted from your bank account. On the other hand, with credit cards, issuers allow consumers to borrow money and, if they choose, repay over time. Secured credit card issuers require you to make a deposit with their institution in an amount equal to your line of credit.

Am I responsible for their debt?

If you are not “listed on” the account in any way, such as being a cosigner, then you should not be held responsible for the debt. However, it is not uncommon for young adults to need their parent’s assistance with debt problems. Therefore, credit education and open communication are very important.

What is the worst that can happen if they cannot pay their debts?

Most obviously, they can ruin their chances of obtaining future credit for the next seven years. If the creditor decided to pursue collection efforts, what is possible depends on state laws. Each state sets laws as to what, and how, a creditor can collect on a delinquent account. Some states can force you to sell some of your assets to satisfy a judgment. To learn your state’s laws, contact your local consumer protection office. To find yours, visit the Federal Citizen Information Center's web site at ConsumerAction.gov.

A while back, I participated in a televised call-in show about kids and money with members of the Jump$tart Coalition. In preparation, I posed questions to a group really talented, dedicated people from organizations like Young Americans Bank, The American Institute of Certified Public Accountants, and the Financial Planning Association. The result is one heck of a resource on kids and money with topics covering budgeting, credit, cars, school/college, and jobs.

Today, I’m going to share a some questions and answers about budgeting. (Disclaimer: not every answer will reflect the views of all participating organizations.)

How do I begin the discussion about money?
Connect your discussion to an actual activity or event. For instance, before you go grocery shopping, discuss how much money is in the food budget and let your child make the grocery list. As you shop together, encourage your child to conduct price comparisons. Make certain the discussion is informational, not emotional.

When should I begin teaching my teen about money?
Children as young as 2 or 3 years of age can be encouraged to save money in a piggy bank at home. Children at 5 or 6 years of age may be ready to open up their own savings account at a bank. Children between the ages of 7 and 9 should start learning about investment options.

What is the best way to teach them about money management?
It’s not possible to teach money management to children by simply telling what you want them to know. They need to learn by doing, they need field trips, and they need one-on-one conversations with you. Make a special time to discuss money, perhaps during an outing to your child’s favorite restaurant. They need to learn through their mistakes. Teaching children about money is one of the greatest gifts you can give—lessons learned last a lifetime.

Do I bail them out when they run out of money?
Perhaps the first time, but only if you do so by drawing up a contract/agreement with specific repayment terms. Don’t forget to include an interest payment! Young people need to learn from their mistakes and they need to experience the consequences of their actions.

Do I give them an “allowance?”
Yes. The amount of money is not as important as adhering to a regular payment schedule. Allowances should be reviewed in private, on a certain date (perhaps on the child’s birthday). There can be increases each year, but with this additional money new goals for its use must be set.

How much should I tell them to save?
For teens, a useful formula is 70% spending, 20% savings and 10% sharing (charitable donations) of income (income= allowance, gifts of money, stock dividends, and so on.) For younger children, a useful formula is one-third spending, one-third savings, one-third sharing. Setting savings goals can actually help determine how much the teen/child should save.

At what age should a child receive allowance?
Children between the ages of 5 and 6 (first grade) are great candidates for receiving a weekly, bi-weekly, or monthly allowance. The most important thing about allowance is that the amount and distribution time are consistent so children can plan how to “live within their income.” Avoid controlling how your child spends his/her allowance. The freedom to make mistakes and the self-esteem that comes from learning to make spending decisions is why children need to have an allowance.

Is it appropriate to tie allowance to chores?
The primary value of an allowance is to teach children how to manage money. Children can only learn how to live within their means if they can count on a set amount of money at a set time. Use chores as an expectation of being a member of the family and consider withholding privileges such as television, using the phone, etc., as a consequence for not completing chores.

At what age is it appropriate to give your child more financial responsibility, i.e., clothes allowance or entertainment budget?
Assuming your child as been receiving an allowance for a number of years and has experience in making monetary choices and decisions, youth between the ages of 12 and 13 are good candidates for more fiscal responsibility. Set specific guidelines for the clothes allowance. For instance, decide what clothing items the teen is responsible for and what items the parent is responsible for.

How much of the family financial situation should be shared with my teen?
The more information that you are comfortable sharing with your child, the more financially fit s/he will be as an adult. Don’t be afraid to share your financial mistakes with your teen --- let him/her learn from your mistakes. Remind your child that financial matters may be confidential.

What is appropriate to provide my teen: car, insurance, clothing?
Raising financially fit teens may depend on providing opportunities for teens to take partial or all responsibility for these items. If you have encouraged savings habits and have helped your child to set savings goals, it’s very possible that s/he can actually buy a car, insurance and clothes!

How do I tell my teen that it is okay to go without?
A great exercise is to have your teen identify his/her needs and wants. Explain that a need is something that you must have to survive and a want is something you’d like to have. Going without something you want in order to afford something you need is just another way of living within your means.

Is there a simple way to create a budget?
Yes. First, begin by identifying all the sources of income (allowance, job, gifts, stipends). Then list all of your expenses (food, transportation, clothing, housing, etc.). Subtract your monthly expenses from your income. If there is money left over, consider additional expenses such as entertainment, cell phone, etc. Also consider budgeting for saving and sharing (charitable donations.) Track your outflow of money and be ready to tweak your budget next month.

Is there a difference between a budget and a spending plan?
Not really. Some people feel constrained by the idea of budgeting. Creating a spending plan sounds more positive. One of the most important personal money management rules is: Live within your income. To accomplish this, most of us need a plan for how we will spend our money.

How do I encourage my teen to set short-term and long-term goals?
Share your short-term and long-term goals with your teen. Share goals that you have achieved and explain how you accomplished them. Listen to your teen and help him/her discover their dreams and passions. Then sit down together and start creating an action plan. You might want to make sure the goals are compatible with your expectations.

What are the five things teens need to know about money management?
1. How to manage a checking account
2. How to manage a credit card
3. How to make and live within a spending plan/budget
4. How to use a debit/ATM card responsibly
5. How to plan for the future Check back tomorrow for the Q & A on kids and credit!