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6 steps to your teen's first credit card

Giving your teen a credit card can help your child build a good credit history. Here's how to prepare him or her for the responsibility.

By Stacy Johnson Sep 4, 2012 11:49AM

This post comes from Angela Colley at partner site Money Talks News.


Money Talks News on MSN MoneyTeenagers know a lot of things adults don't, from how to deftly use social media to where to find the perfect smartphone apps. But they apparently don't know much about money.


ING Direct and Capital One recently surveyed kids ages 12 to 17 about personal finance. Only 17% claimed to know a lot about money. When asked what they want to learn most about, only 28% picked budgeting. And here's a scary stat: One in four teenagers didn't know the difference between a debit card and credit card.


If you've wondered how to teach your teen how to use credit responsibly, Stacy Johnson offers some tips in the video below. 

Understanding and managing credit is important because a stellar credit history is important. As adults know all too well, what's in a credit report can influence everything from the ability to buy a house to getting a job.


Here are six steps to get your teen started: 


1. Talk to your teen about money.

Image: Father and son (© Bill Cannon/Photodisc Red/Getty Images)This is the first step to putting them on the right path, but many parents say it's harder than the birds-and-bees conversation. The ING Direct and Capital One survey found that while 35% of parents are prepared to talk to their teens about drugs and alcohol, only 26% are ready to talk about money. The best advice from experts: Keep it simple. Don't overwhelm your teen with too much information at first. Just stick to the basics, like the difference between a credit and debit card.


2. Get a prepaid card.

A prepaid debit card will give your teen low-risk experience using plastic, since the maximum he or she can spend is what's loaded on the card. The downside? Potentially high fees to maintain the account. The card issuers also don't report the user's spending activity to credit bureaus, which means your teen won't build a credit history by using the card.


3. Start a budget.

Work with your teen to create a budget. It doesn't have to be complicated. A simple budget that identifies income and expenses will do the trick. But make sure your youngster tracks expenses, including cash, and compare what was budgeted with what was actually spent every week or month.


4. Open a checking account.

Many banks and credit unions offer what's called "minor" or "student" checking accounts that often have lower fees than standard accounts. By opening a basic account, your teen will get accustomed to making deposits and reconciling a checkbook. You can add a debit card tied to the account when you feel your teen is ready.


When you open a checking account for your teen, you have the option to either sign on as a co-signer or let them go it alone. Co-signing will allow you to better monitor the account, but you'll be responsible for any fees if your child overdraws the account and can't pay the fees that result. Ask if your bank offers overdraft protection through a linked savings account or credit card.


5. Move on to credit cards.

Once your teen has proven skills with a checking account and debit card, it's time for a credit card. Due to the Credit CARD Act, people under 21 can't get a credit card on their own without either a source of income or a co-signer. So if your teen doesn't have a job, you'll need to co-sign their application, which essentially is opening a joint account. Another possibility is to add your teen onto your existing credit card as an authorized user.


Keep in mind that with a joint credit account, both you and your teen are responsible for the bill. If you add them as an authorized user on your card, you're solely responsible for the bill. Both methods can help your teen establish a credit history, but a joint account carries more weight with lenders and will better help your teen eventually to qualify for credit on his or her own.


If you want your teen to have a credit card but are concerned about your child's financial discipline, you could open a joint secured card. With a secured credit card, the available credit on the card is limited by the amount of security deposit you put down. Like a debit card, it will prevent overspending. 

6. Set a good example.

If you want your kids to stay off drugs, you probably don't smoke pot in front of them. Kids learn from their parents, so if you want your kids to be good financial stewards, be one yourself. Stress the importance of a good credit history by having one. Show them how important it is to pay bills on time by doing it.


Your good credit can help your offspring establish their own, but if you miss payments on the card you hold jointly with them or they're authorized on, you're hurting their credit. Not a good way to start out in life.


More on Money Talks News and MSN Money:

Dec 11, 2012 2:18PM
Discover Card has a pretty solid promo going on right now.  They are offering $100 cash back if you charge $500 within three months.  This isn't bad on it's own, but I called them and they said you can also tack on a $50 referral bonus if you sign up with an existing customers link.  That's a pretty easy $150.

This is the direct link to the Discover site that allows you to sign up for both combined offers:

Also - my wife is an existing Discover Card holder and she was able to call them and get the $100 cash back anyway just by saying she would switch, so if you already have a card you should definitely try that!
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