3. "I think you're ready for a debit card. Here's how it works."
Plastic is an indispensable part of your child's money education. Bill Hardekopf, founder and CEO of the credit card information website Lowcards.com, says a good first step is giving your tween an ATM card tied to his savings account. He can draw from funds he's stashed himself (from his allowance, birthday and Christmas presents, etc.) or from deposits you've made for essentials like school clothes or sporting goods. "Debit cards teach kids how to spend responsibly," says Hardekopf. If your tween splurges on, say, a new video game and doesn't have enough for new sneakers, that's his mistake—and he'll learn from it. Plus, you can track his purchases online and steer him back in the right direction whenever he veers off course.
Make sure to opt out of any automatic overdraft protection programs—and turn that into a teachable moment as well. Explain to your child that drawing on funds you don't have is the same as borrowing from the bank, and that the interest rates are sky high. Having purchases denied at the cash register will drive home the point that he has to stick to a budget. Hardekopf and other experts also advise steering clear of prepaid debit cards—especially those marketed directly to kids—that require you to deposit a certain dollar amount. The high application, monthly maintenance, deposit and transaction fees quickly add up, and simply aren't worth the cost.
4. "Here's your first credit card—congratulations! Now I'm going to spell out the rules and your responsibilities."
By the time your child is a junior or senior in high school, you may want her or him to understand how credit really works—including interest rate hikes, teaser rates and other tricks banks and some issuers use to milk you of your money. The Credit Card Act of 2009 eliminates some of the worst abuses, but there is still a lot for teens to learn. "Sit down and show your teen your own credit card bill so you can point out everything from grace periods to minimum payments," suggests Hardekopf. If she's been managing her debit card well, go ahead and make her an authorized user on your credit card account, but only for purchases you've preapproved or in case of emergency. Continue to go over your monthly statements together, making clear that if she runs up charges she shouldn't, you'll ask her to return the items or you'll take the card away.