Credit/Debit Cards, Checking Accounts, Teach Teenagers to Handle Money

When eighth grader Jemma Sepich, age 13, wants to buy a pair of earrings at the mall, she pulls out her checkbook or her debit card. She's had a checking account and debit card for about six months now and, according to her mom, Joanne, "She's been very responsible with it."

Jemma's part of a growing trend: More parents are introducing their teenagers to checking accounts, ATM (automated teller machine) cards, debit cards, and even credit cards. And many experts encourage this form of financial education--teaching children about responsible use of financial services while they're still at home. Especially since most schools don't offer financial education.

When teenagers leave home they're bombarded with credit card and other loan offers. If they've already learned to use financial services responsibly, with their parents' help, they're less likely to get into trouble--paying high interest rates and fees, missing payments, amassing excessive debt, damaging their credit ratings.

"It's unrealistic to learn about financial services only in the abstract--or not at all--then go to college or live on your own and pick up a credit card for the first time," says Philip Heckman, director of youth programs, Credit Union National Association (CUNA), Madison, Wis. "You'd have to learn about them all on your own and deal with that responsibility."

Children are ready at different ages

Heckman says it's never too early to teach children about money; even preschoolers can participate in family discussions about spending. "Children will learn about money on their own, from advertising and other sources; parents need to be involved and take active steps to instill their own values."

Any child with a financial goal is ready for a savings account, and when a young person has a steady income, it's often time to teach money management through use of checking accounts and ATM or debit cards. Columnist Liz Pulliam Weston, in an MSN Money article, calls debit cards a "training wheels" approach to plastic. Teenagers can practice using plastic, but can spend only the money in their checking accounts; they can't run up huge balances.

"Parents know their kids best; one might be ready at age nine, another might not at 19," adds Sepich. "Jemma's pretty aware financially; I knew she could handle it. She's had a savings account at our credit union since she was three years old. She also participated in the youth program--where the credit union offers prizes for saving, among other activities; this is the next logical step."

She continues, "One nice thing is that, because Jemma's so young, she's willing to learn how to use the services properly. When we go to the grocery store, she's studying me and asking questions: 'When do you use debit instead of a credit card? When do you use a PIN (personal identification number)?' "

After teenagers become proficient at using checking and ATM or debit cards, some parents let them open credit card accounts, usually with low credit limits such as $200 or $300. If the teenagers pay the balance off regularly and on time, they build a positive credit history--essential for basic transactions like renting apartments, getting good jobs, and obtaining car loans once they're on their own. It also lets teenagers learn to manage credit while their parents are there to help.

Education is key

"Before young people open a checking or credit card account, financial education is vital," says Heckman. "No child should be allowed to use financial services without demonstrating that they understand their end of the bargain."

For checking accounts, this means understanding: That it may take a few days for deposits to hit the account and the money to become available.

For debit cards, it means understanding: That the card looks and acts like a credit card, but withdraws cash from the checking account instead of creating a loan. The importance of safeguarding the card and PIN. What to do if the card is lost or stolen.

With credit cards, it's important to understand: How compound interest works. How to choose a low-rate, no-annual-fee card. How grace periods help avoid finance charges. That--with most cards--if you carry a balance, you lose the grace period and pay interest from the moment you make any new purchases. The cost of making just the minimum payment. That exceeding the credit limit or paying late results in significant fees, and possibly higher interest rates. That misuse of the card creates a poor credit history. What to do if the card is lost or stolen.

Many credit unions offer youth financial education classes to teach these concepts; other courses are available online. "Jemma took CUNA's online 'Guides to Independence' courses through a credit union before getting her checking account and debit card," says Sepich. "They covered how to open a checking account, how to balance the account, and other topics."

Parents need to be involved

"Many young people are mature enough to accept the responsibilities," says Heckman.

"Parents should go over the first few statements with their children, and explain how to read them. Go through the statements step by step and show them how to reconcile the account against their records," he recommends. "Then be there as a resource when they do it on their own."

"Jemma's account has to be in an adult's name, so I'm a co-accountholder. I explained to her that if she bounced a check, it would be on my record," says Sepich. "She has online access to her account and checks her balance; she's never bounced a check.

"This is a great time to make mistakes and learn from them, and be willing to turn to mom, dad, or grandma and get some advice and coaching," she continues. "It's a great time to make mistakes and learn early on. It's easier to recover."

Monitor the accounts

After young people are accustomed to managing their accounts, parents still should monitor them. "Assuming there's a regular channel of communication, ask for periodic updates," Heckman advises. "In most cases that will be enough."

Parents also may want to look at an account statement from time to time. "Experience will tell if you need to do that monthly or just once in a while," says Heckman.

"If a young person is demonstrating responsibility, not as much monitoring is necessary," he adds. "Independence is a reward for good behavior. Parents will have to make that determination for themselves."

Take the consequences of mistakes

With credit or debit cards, if it happens too often, "They should lose the privilege--parents should step in and take the card," he adds. Heckman notes that some financial institutions will "allow" a person to overdraw repeatedly or make late credit card payments and pay numerous penalties--a costly lesson.

Even if you misjudge a teenager's maturity level and allow credit cards too soon, "It's still better if it happens while they're at home," says Heckman.

Published February 20, 2006