Good Credit Practices for Teens

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It can drive a parent crazy: a child getting a credit card without permission and racking up an enormous bill.

But soon this will be less likely, as new credit card rules take effect Feb. 22 and will make it harder for people under 21 to get cards. Under the CARD Act passed last year, these young people will either have to get a parent’s permission or show they have independent income.

Of course, it’s not entirely bad for young people to have the tools they need to live in today’s world, where plastic has largely replaced cash, and where checkbooks seem like something out of a previous century. So, what’s the best way to set a child up and make sure spending stays under control?

For parents, there are two strategies: keeping control and instilling good habits.

For control, the parent can insist on having online access to the credit card account, in order to keep abreast of spending. Remember, too, that you can set a credit limit lower than the maximum the card company would approve. These days, many card companies also allow account holders to sign up for automatic alerts when certain spending limits are reached.

Another way to keep control is to let the child have a debit card rather than a credit card. Debit cards draw on balances in checking accounts. If you opt out of overdraft protection, you won’t have to worry that your son or daughter will rack up big fees for excessive spending.

With a debit card, you can control the cash in the account, setting a firm monthly budget. You could even transfer money out of the account if spending gets out of hand, or keep cash levels low, only putting extra money in for special purposes like paying for the child’s airfare home.

Instilling good habits involves lessons on budgeting and getting real value. Ideally, those lessons should start well before a child is old enough to be armed with plastic.

Budgeting obviously involves planning ahead on spending, and setting limits for various categories. But it has always been a chore to assess spending after the fact, especially when you see how "little" expenses like lunches, snacks and entertainment add up.

Fortunately, that’s now much easier with free online services like Mint.com. This service, now owned by Intuit (Stock Quote: INTU), creator of Quicken financial software, allows the user to link to any number of banking, brokerage and mutual fund accounts. All income, spending and debts can be displayed on one screen and sorted by category (groceries, restaurants, home expenses, etc.).

Mint allows the user to set up automatic alerts for low account balances, impending bill due dates, low available credit or purchases that have exceeded a pre-set budget. Alerts can be sent to more than one e-mail address, so a parent could get them as well as the child. Alerts can even be set up for a mobile phone.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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