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 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.
Probably the most fundamental tool for helping students manage their finances is a checking account with a debit card. A few tips:
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 www.mint.com and review the account online weekly to know when transactions have cleared.
Avoid writing checks or making debit card transactions unless the current balance will cover them.
One way to build credit history is through responsible use of credit cards. The 2009 Credit CARD Act requires that people under age 21 now must have a parent or other responsible adult cosign on any credit card account unless they can prove sufficient income to repay the debt.
Although this new policy probably will prevent many young adults from amassing more credit card debt than they can afford, it may also make it more difficult for them to begin building a credit history. A couple of alternatives are available to parents:
Make them an authorized user on one of your accounts. They'll get their own card and you can usually restrict the amount they can 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, any account activity, good or bad, goes on both your credit reports, so careful account monitoring is critical.
Those who haven't yet demonstrated financial maturity may not be ready for an unsecured credit card or loan. Two alternatives include:
A secured credit card 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 can ask the lender to convert it to an unsecured card, or at least add an unsecured amount to the account.
A prepaid debit card, where you load the card with money in advance and they use the card for purchases or ATM withdrawals. You monitor account activity online or by phone.
With each, fees and restrictions may apply so shop around for the best terms.
If you need help educating your kids about personal financial management, a good resource is What's My Score (www.whatsmyscore.org), a financial literacy program for young adults run by Visa Inc. It features a comprehensive workbook called Money 101: A Crash Course in Better Money Management, which can be downloaded for free.
[Jason Alderman directs Visa's financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.]