Teaching Children Healthy Money Habits

In another recent article published on creditcards.com, author Barri Segal contacted me to contribute my thoughts posted here:

Psychotherapist Debra L. Kaplan said one of the greatest changes to an adolescent’s life is their new and growing relationship to money and spending.

And parents must teach children limits on any behavior, including access to credit cards, cellphones and other devices that enable online payments.

“In this digital age, it’s easier for children to use credit cards without permission because there is no tangible connection to a credit card when it is loaded into a website for ease of access purchasing,” Kaplan said.

So you really need to be monitoring your child’s cellphone use, especially if you’ve stored credit card information on there.

Scott Butler, financial planner at Klauenberg Retirement Solutions, said he often hears people talking about how you are not legally responsible for unauthorized charges, including those made by your own children.

That might be so in certain situations, even though many credit card companies are likely to do everything that they can to collect anyway.

But, Butler added, it’s quite common in these situations for the parent to feel at least some degree of guilt and responsibility for charges, even if they are unauthorized.

“Teaching your child about the proper uses of credit — perhaps by giving them their own credit card — will reduce the likelihood that your child makes unauthorized purchases,” Butler said.

Although parents are generally not liable for unauthorized purchases made by their children, the parent can use this as a teachable moment and pay for the purchase, said Kassandra T. Dasent, personal finance consultant.

More extreme measures may be warranted if your child repeatedly uses your card without permission or steals it from your wallet.

“The tough love approach in a severe situation would be to file a report with the police and open a case with the credit card company, in order to prove that the charges were indeed not authorized and theft was involved,” Dasent said.

Children with credit cards: The pros

Many experts agree it’s a good thing to give a child a credit card.

One advantage is that it provides a new opportunity for parents to teach children about responsible spending.

Kaplan feels giving a child a physical card is the best way to go.

“Because children with cellphones are now exposed to the concept of payments via digital wallets, the physical presence of a card might actually help a child understand the value of money since digital and virtual currency removes that fine connection to permanence,” Kaplan said.

And Butler said the greatest benefit of giving a credit card to your child is the opportunity it provides to teach them about good credit behaviors and the dangers that go along with using credit.

“You will need to take the time to walk your child through bills, pointing out things like APR and finance charges. Ideally, you will start your child off with a low credit limit, which you can increase over time as he or she shows they are ready for more responsibility,” Butler said.

He also recommends parents monitor their child’s credit card usage and review it with them.

There should be clear consequences to go along with rules about when and what purchases are acceptable to make with the card, he added. You should also set up a way for your child to take responsibility for making payments, even if the bills are not paid with their money.

As long as giving your kid a credit card comes with educating them on how to use one responsibly, then it could help them out later in life, said James Garvey, CEO and co-founder of the website Self Lender.

“After all, not only do they get the financial education to use their money responsibly and mindfully as an authorized user on your account, they also get to start building credit history sooner rather than later,” Garvey said.

If your child is an authorized user on your card account, it can help him or her get an early start on building a credit history. However, you may want to check with your card issuer to find out if it will report your child’s authorized user account to the credit bureaus (some issuers don’t).

Keep in mind that if you don’t use your credit responsibly, then it could hurt your child’s credit history, rather than help, Garvey warned.

Children with credit cards: The cons

Some experts feel it’s not a good idea to give a child a credit card. Ellie Thompson, CEO of the website Money Therapy, thinks it’s potentially disastrous if your own credit history is troubled.

“If you aren’t using your credit card correctly and paying off debt every month, chances are you might teach your children that same behavior,” Thompson said.

If you don’t have a great track record with your credit card, do not allow your child to have one, she warned.

Yea or nay?

Giving your child a credit card might be worthwhile if you closely monitor his or her usage.

Consider adding your child to a card that has a low limit, and make sure you track his or her spending. This way, you can teach your child good practices for responsible spending and managing credit card debt. Ultimately, it’s up to you to decide, so weigh the pros and cons and make the choice that’s right for your family.