Help your child manage credit

(Money Magazine) -- In recent years college students could get credit cards almost as easily as they could score beer. Some 84% of undergrads have at least one card, a Sallie Mae study found, and half carry four or more.

But new legislation taking effect in February prohibits banks from issuing cards to those under 21 unless they have an adult co-signer or proof of means to cover payments. On the plus side, the restrictions are likely to reduce the amount of card debt the average student racks up ($4,100 for seniors in 2008). But co-signing could leave you with a big bill and a battered credit score if your teen flakes out. Before putting your signature and credit rating on the line, try this three-step approach.

STEP 1: START WITH DEBIT

When you help your child open a checking account -- ideally by age 16 -- ask for a debit card connected to the account, says Boston financial planner Susan Brown. Your kid will get the hang of using plastic but can spend only up to the account balance (or risk an overdraft). Review monthly statements together. If he regularly empties the account, it's time for a budgeting lesson.

STEP 2: SHARE YOUR CARD

Once your teen has proved she can use a debit card responsibly -- and is a high school senior or older -- add her as an authorized user to one of your credit cards. She'll get a card with her name on it, and the account will appear on her credit report. It'll still appear on yours, and you'll be liable for the bill. So set clear guidelines on what can be charged and who will pay. If your teen breaks the rules, remove her from the account.

STEP 3: GO IN TOGETHER

Only after your young adult has used your card responsibly for two years might you consider co-signing on a card in his name. (If Junior has already demonstrated trustworthy behavior, you could have him apply for a solo card before February.) As co-signer you are still on the hook -- in terms of your wallet and credit score -- for any card payments the child doesn't make. So emphasize the importance of paying on time and in full. (Use the credit calculator at bankrate.com to show the cost of paying only minimums.) Monitor the account online, and step in at the first sign of trouble.

Have doubts about co-signing? "Parents are so worried about kids establishing credit," says Wynnewood, Pa., financial adviser Fred Amrein. But there's no rush, he adds. If your child isn't ready, it isn't worth risking her credit score and yours.