If you've got teenagers heading off to college soon, I hope you've done a good job educating them about the importance of personal financial responsibility and how to build a strong credit history. If not, better do it now.
College freshmen and young adults entering the workforce will encounter many unfamiliar expenses -- and temptations -- so it's important to help them avoid early financial missteps that could damage their credit for years to come. A poor credit score can impact their ability to qualify for loans, secure favorable interest and insurance rates or even get a job or an apartment.Probably the most fundamental tool for helping students manage their finances is a basic checking account with a debit card. Here are a few tips for finding and using these accounts:
- Look for a bank or credit union that charges no monthly usage fee, requires no minimum balance and has conveniently located ATMs so they don't rack up foreign ATM charges.
- Enter all transactions in the check register or use a digital tool like Mint.com and review the account online weekly to know when deposits, checks, purchases and automatic payments have cleared.
- Avoid writing checks or making debit card transactions unless the current balance will cover them -- such transactions often clear instantaneously.
- Banks and credit unions now must ask customers whether they want to opt into overdraft protection plans for ATM and most debit card transactions (but not for personal checks and automatic transactions like monthly bill payments). If your kids do opt in, make sure they know that overdrafts can be expensive -- up to $30 or more per transaction.
- Alternatively, have them ask if the bank will link their checking account to a savings or other account to avoid overdraft charges.
- Have them ask for free text or email alerts when their balance drops below a certain level, checks or deposits clear, or payments are due.
- Make them an authorized user on one of your accounts. They'll get their own card and you can usually restrict the amount they're able to charge. Authorized users are not legally responsible to pay balances owed -- that's your responsibility, so tread carefully.
- You can add them as a joint account holder to a new or existing account -- preferably, one with a small credit limit. Joint account holders are equally liable to pay off the account.
- Just remember that with both these alternatives, any account activity, good or bad, goes on both your credit reports, so careful account monitoring is critical. Make sure they don't make late payments or exceed the credit limit; otherwise your own credit score could be damaged.
One alternative is to get a secured credit card that is linked to an account with the card issuer to which they deposit money. Typically, users can charge up to the deposit amount, which can be replenished. Then, after a period of on-time payments, they ask the lender to convert it to an unsecured card, or to at least add an unsecured amount to the account. Just make sure the lender reports payment history to all three credit bureaus.
And finally, prepaid debit cards are another tool for teaching teenagers how to manage an account balance. You load the card in advance with money and then your child uses the card for purchases or ATM withdrawals, up to the account balance. You can monitor account activity online or by phone. Fees and restrictions may apply so shop around for the best terms. Although prepaid cards are a good tool for learning how to manage money, they do not help build credit history.
If you need help educating your kids about personal financial management, a good resource is What's My Score , a financial literacy program for young adults run by my employer, Visa Inc. Among other tools, it features a comprehensive workbook called Money 101: A Crash Course in Better Money Management, which can be downloaded for free.
Bottom line: If you have doubts about your kid's ability to manage his or her finances, start out slowly and don't put your own credit at risk.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
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