Forget the birds and the bees: One of the most difficult – yet most important – discussions you can have with your children before they head off to college concerns the financial facts of life. Because a few early financial missteps can damage their credit for years to come, it's important to set your kids out on the right path.
Banking 101. If this is the first time your kids have been responsible for managing more than a weekly allowance, teach them the importance of tracking their financial transactions. Start with tips for properly managing checking accounts:
- Check account balances online or by phone every day to know when deposits, checks and debit card purchases have cleared.
- Because they often clear instantaneously, don't write checks or use debit cards unless you know your balance will cover the transactions.
- Keep accurate balances by regularly entering all transactions into a check register. One forgotten ATM withdrawal could cause a cascade of bounced check or overdraft fees. Note that, as of July 1, 2010, customers must opt for overdraft protection to be charged overdraft fees on ATM withdrawals or debit card purchases.
- Using non–network ATMs can rack up significant service charges. So choose a bank or credit union with convenient ATMs, or use your debit card for cash back when shopping.
- Ask if your bank provides free phone or email alerts when your balance dips below a certain level, checks or deposits clear, or payments are due.
- Debit cards are safer than carrying cash and are accepted by most merchants. Ask if your card offers "zero liability," which means you pay nothing for unauthorized or fraudulent purchases.
Ease into credit cards. Using credit cards responsibly helps build a solid credit history, which your kids will need later in life. But credit is essentially a loan that must be paid back, so urge them to tread carefully:
- Start with only one credit card until you know you can manage it properly. Try never to owe more than 30 percent of your credit limit on any card.
- Strive to pay off the full balance each month; otherwise, the accumulated interest will add significantly to your repayment amount.
- Try to avoid using credit cards for cash advances, which can incur upfront fees plus having interest accrue immediately.
- Don't be tempted by free giveaways or low introductory rates that often rise dramatically after a few months.
- Look for cards with no annual fee and a lengthy grace period before finance changes begin. Also compare cash advance, late payment, balance transfer, over–the–limit and other fees. A good place to comparison shop is www.bankrate.com.
Look forward. Before you know it, your kids will graduate and start careers. Don't let them start out with damaged credit that'll take years to repair. This means avoiding making late payments, bouncing checks, opening too many accounts, exceeding credit limits and accumulating too much debt. All these missteps can lower their credit score and make it difficult to borrow money for a house or car, rent an apartment or even get a job.
To learn more about understanding and building strong credit scores, have your kids visit What's My Score (www.whatsmyscore.com), 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.
Your kids are about to enter the most exciting period of their lives. Make sure they do so with their eyes wide open about the importance of sound personal financial management skills.
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