When Should I Open a Bank Account for My Child?
Making the leap from piggybank to bank account is a rite of passage for any child. But determining exactly when to orchestrate that jump for yours, and how to do so, will depend on the goal at hand. "If the intent is to start stockpiling for college, it's never too soon," says Ken Tumin, founder and editor of DepositAccounts.com. But if you're hoping to teach good banking habits or grant a kid the independence of making purchases without you, wait until she can grasp the value of saving—typically around the time she starts getting an allowance for household chores or has a first summer job.
Because minors typically cannot open a bank account or credit card on their own (due to the fact that each requires signing a contract), you'll be involved in this process, at least to some extent. The decision of how involved you want to be, and on the flip side, how much responsibility you're willing to give to your child, will determine the type of account or card you choose. Here are four options, ranging from the kind requiring the most oversight on your part to the least.
Primarily an investment tool, a custodial account gives the adult who opens it full control of the funds, which will belong to the child once she reaches the "age of trust termination"—usually 18 or 21, depending on your home state. (At that point, how she spends the money is her prerogative.) In the meantime, it helps delineate savings for your child in a single spot, which also serves as a holding place for any assets she's gifted over the years (like money for birthdays or holidays).
Prepaid Debit Card
Handy for a preteen who makes solo purchases (such as pizza after school or snacks at the corner store) but doesn't have a job yet, a prepaid debit card—which isn't linked to an actual bank account—allows her to spend only the amount loaded onto it. "It can help teach a child about money while reducing the risk of crazy spending," says Matt Schulz, chief industry analyst at LendingTree. But once you hand it to your kid and effectively give her free rein over its contents, be sure to continue having conversations about money, Schulz adds. For example, let her buy something and experience buyers' remorse—and use that to spark a discussion about the relative worth of various goods.
This type mirrors a typical checking or savings account, but instead of being in one person's name, it's associated with two or more account owners who are all able to deposit to it or withdraw from it. Consider this option if you have a trustworthy teen who can contribute her own funds and understand the monetary risk of overdrawing. Sharing an account with your child allows you to oversee usage, and even set up alerts to be informed of each purchase, says Tumin. At the same time, your kid gains the benefit of having her own debit card to use while visiting stores or restaurants without you.
Secured Credit Card
Once your child turns 18—and has proven her ability to manage a bank account—she's ready to start building her own credit. Her first step in that direction is a secured credit card, says Schulz, which works like any other credit card, except that it requires a deposit to open (typically as low as $200).
The amount you deposit sets the credit limit, says Schulz, so your kid won't be able to spend beyond that number in any given month. But unlike with a prepaid debit card, in the case of a secured credit card, the spendable amount reverts back to the original at the start of the next month so long as it's been paid off. And with each month that your child pays the balance, she's working toward better credit. "This minimizes the risk for everyone involved," says Schulz. "A teen can make purchases in moderation, a parent can rest assured that the most money they'll be out is about $200, and a bank can feel confident approving the card because, if the kid were to not repay, they already have collateral in the form of the security deposit."