How to Teach Kids Financial Responsibility

A credit card guru shares his secrets of passing on the most important lessons.

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These days, everyone pays with plastic. Carrying change is inconvenient, cash is easy to misplace, and using credit (and some debit) cards can earn rewards for purchases. Because people are noticeably less money-conscious when they don’t actually have to turn over dollar bills for their purchases, it’s essential to teach kids to use plastic wisely. With some coaching, you can help your child navigate the credit world and shield them from potential dangers along the way.

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Starting early: checking and savings accounts

Checking accounts give the ease of using plastic without the risk of a line of credit. The Federal Reserve recently prohibited banks from allowing customers to overdraw on their accounts without warning, so each time you overdraw (and therefore incur fees), you need to opt in, fully aware of the costs. After this regulation, debit cards carry even less risk than before.

Signing your child up for checking and savings accounts accomplishes a number of goals: she learns to use both a plastic card and cash, she can stow away part of her money for a later date, and she can even earn rewards with certain accounts.

Some checking accounts are specially designed for youth, and allow parents to deposit directly and automatically into the account. They can also send updates on the account’s balance via text or email and give the parent custody over the account until the child turns 18.

Building a credit history: young adult credit cards

Though lending to students has gotten negative attention lately, there are benefits to acclimatizing your teenager to credit cards while he’s still at home. First and foremost, he’s less likely to go nuts with his first credit card when he’s away at college or out in the workforce. Although the Credit CARD Act of 2009 restricted lenders’ ability to market to students and strengthened income requirements, good financial sense is the best guard against irresponsible credit card use.

A number of credit unions offer Young Adult Visas, which allow youths to establish a payment history with their parents as co-signers. In addition, there are various student credit cards that offer rewards and interest rate deals similar to those for adult credit cards. In order to qualify, an applicant must be over 21 and have a steady source of income, or have a co-signer who meets those criteria.

[In Pictures: 10 Smart Ways to Improve Your Budget.]

One card to avoid: prepaid debit

Prepaid debit cards function rather like regular debit cards: cardholders load money onto their cards and can only spend what’s already on the cards. Many prepaid debit cards marketed toward parents highlight their zero-overdraft, zero-liability benefits and promote themselves as tools to teach financial responsibility. However, unlike regular debit cards, prepaid ones usually come riddled with fees from ATM withdrawal charges to monthly or yearly levies. Because of the heavy (and often hard-to-find) fees, a prepaid debit card is usually not a sound financial choice.

Parents can, however, use prepaid debit cards as a lesson on reading terms and conditions carefully. Fee schedules are usually buried deep in the cardholder agreements, further evidence that close readings pay off. Comparing prepaid debit cards to regular checking accounts is a great way to help a child make wise decisions on his own.

Despite the negative press surrounding lending to older teenagers and college students, this is the perfect time to learn the sound financial skills that will serve them well for the rest of their lives.

Tim Chen is chief rewards credit card analyst at