January 2010 - Personal Planning

From setting allowances to extending shared credit, parents must contend with constant challenges related to how money affects their children. But challenges are also opportunities, and most money matters involving children have the potential to provide useful learning experiences. For example, the simple exercise of setting and paying an allowance for small children can often positively reinforce certain desired habits and responsibilities—whether or not chores or other obligations are expected in return—and at the same time encourage respect for money and fiscal discipline. Obviously, these can become important life-long lessons. In addition, the financial independence that is felt by the recipient, though typically quite trivial, can also be very important—and ultimately develop into something more significant and productive over time. Of course, paying an allowance, while common, is certainly not required and it is inevitably up to each and every parent to decide; but like so many other money matters that involve children, it should at least be deliberately and thoughtfully considered.

Another challenge, or opportunity, for parents arises around the use of credit and debt. Since even young children can use credit cards (or debit, charge or pre-paid cards), and since they will likely eventually get them on their own much earlier in life than previous generations did, it is probably never too soon to begin this kind of education. In fact, real, but controlled, experiences with credit and debt at an early age might be quite valuable. However, most credit card companies do not offer individual credit cards to minors, because children are not able to enter into legal contracts. And yet many companies allow children to be linked to parental accounts, though age limits often apply. The minor who holds an additional card is called an additional cardholder, authorized user or secondary account holder; but only the primary account holder is legally responsible for making payments. Still, if that person fails to make payments, then their credit history will be damaged; depending upon the issuer, the additional cardholder’s credit might also suffer.

Depending upon needs and circumstances, it might make sense to include children on credit card accounts. For example, credit cards are widely accepted and can be used to get cash, too; and they can be replaced quickly if lost or stolen-which might be useful for children who travel or go to boarding school. Still, it might make sense to set spending limits up front before handing over the secondary card, or ask children to pay their own charges-or at least cover special items. If children are older than eighteen but denied individual credit cards because of lack of credit history, it might also make sense to co-sign their applications. Many companies allow people with good credit to co-sign accounts for others who need to establish credit. However, co-signers, like primary account holders, are legally responsible for the debt; and their own credit could be damaged if payments are not made by others on the account.

Another option is a specific kind of credit card known as the charge card, which still provides the convenience and relative safety of “plastic payment.” Unlike true credit cards, though, which offer revolving credit and minimum monthly payments—but usually with high interest always accruing on carried balances—charge cards require full payment each and every month. This might be preferable if children are responsible for covering the charges because it would instill the discipline of making full payment every month, and thus not permit or encourage the potential to let large unpaid balances accumulate that can become difficult to eventually pay off. Charge cards also do not have pre-set spending limits, which might be useful for travelers or those anticipating the need to make important purchases; however, they will be subject to stiff penalties and late fees for lack of full monthly payment.

Other alternatives include debit cards, which withdraw funds directly from bank accounts; prepaid cards, which contain only what is loaded on them in advance; and secured cards, which are backed by money deposited with the issuer—that will be forfeited if the cardholder defaults—and which might be useful in helping someone build credit. Finally, regardless of whether children are given access to any of these various payment methods, their credit should be checked from time to time with credit bureaus, because even small children can have their identity stolen and their credit history damaged—and if this should occur at a young age it can often go undetected for many years.