Financial Lessons

BUILDING CREDIT

YOU’LL WANT TO START EARLY

It’s never too early to start talking to your child about managing money and ensuring they exhibit good money management habits. Explaining to them how you’re paying for items (writing a check, using a debit card, using a credit card) and how they work will help prepare them for when they have to start making those choices as they get older. These habits will also help them manage their credit history which can lead to better insurance rates and better interest rates and terms on loans, that may save them thousands of dollars over time.

If you have a teenager, there are a number of ways you can help them establish credit, build a credit history, and set them up for financial success. They include:

EDUCATION

Spend time with your teen discussing both the positives of having good credit and the negatives of having poor credit. Talk with them about the types of loans you have, and how they work, how you decided on those loans, what went into applying for them, what the terms are and what factors impacted the rate you received (this could be positive or negative). Also talk about the negatives that can happen if you don’t make your payment on time, or don’t make any payments at all.

GETTING A JOB

Most credit card companies require their applicants to have a steady source of income in order to receive a credit card. Your child will also need a steady source of income to make the payments on the card as well. Allowances don’t count, and if you plan on making their payments for them, you may be setting them up for failure down the road.

OPEN A CHECKING AND SAVINGS ACCOUNT

Managing these accounts for a period of time will teach your teen the basics of money management. They’ll also get comfortable with making deposits, tracking withdrawals, and adding interest earned on their Savings account, some of the same skills they’ll need when managing credit.

GET A DEBIT CARD

When your teen is ready, get them a Debit Card. This will help them gain some financial freedom while teaching them how to manage their money more effectively.

Most financial institutions have accounts that do not allow you to overdraw the account. This will prevent your teen from overdrawing their account with a Debit Card purchase. It may be a little embarrassing for them, but they’ll definitely learn better money management habits if this happens.

SECURED CREDIT CARD

A secured card will give your teen the opportunity to learn how to use a Credit Card responsibly with little risk. The card requires a security deposit equal to the credit limit, typically $500. Let your teen manage the account by making purchases, payments and reviewing the monthly statements with you. These cards typically will convert to a non-secured card after a period of time if the account is managed responsibly.

There are a number of other strategies you can use to start your teen down the road to managing their credit effectively. Just remember, you can, and should, play a significant role at the beginning of their credit journey to be sure they understand everything that is involved–both the good and the bad. They may not appreciate your involvement now, but trust me, when they start seeing the benefits later, they won’t be able to thank you enough.

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Robert Baer is a Vice President at Fidelity Bank. He coordinates Fidelity’s Financial Literacy initiative.