Credit cards for teens has launched spirited debates among parents for decades. With nearly half of Americans carrying credit card debt, it does beg the question as to why parents are ready to usher their teens in to plastic spending.
While it is easy to disparage the idea of teens walking around with ticking time bombs in their wallets, there’s another side to the argument loaded with good reasons as to why they should have a credit card. Assuming teens are able and willing to exercise a mature level of responsibility, there are several benefits that stem from having a credit card at a young age.
Benefits of Having a Credit Card as a Teenager
Early Start on Building Credit
It can take several years for a young person to build enough credit to be able to operate on their own in the real world, especially after they graduate from college. Starting as a teenager or student in college can allow young credit card holders to build their payment history and compile a credit score that will help them get their own apartment and more. Their future employment can be affected by their credit score.
The sooner they have the opportunity to build a positive credit file, the sooner they will be able to qualify for more favorable rates on mortgages or car loans. It is important for teens to see all of this as the end game, so they do all of the right things in managing their credit.
Teaches Financial Responsibility
Although teenagers should demonstrate responsibility before getting a credit card, the real learning curve of financial responsibility begins when they have one. Understanding how credit works and the process of paying bills is a monumental step for any person. Being able to learn the ropes at a young age offers teens a big advantage, but they will only realize this a few years later. In the beginning, they will need training wheels. Someone should go over monthly statements with them to make sure that they pay by the due date. Once they are able to ride on their own, you’ll want to look over their shoulders until you know that they have it down.
The next level is harder. That’s when you need to do everything you can to avoid fostering bad credit card practice. Don’t become an enabler by fixing their mistakes such as late payments and over limit fees without recourse for example. It’s important for them to learn the consequences of their actions.
Develop Good Spending Habits
Using credit cards for teens can help develop sound spending habits. With access to an online account management tool provided by the bank or credit card issuer, teenagers can monitor their spending in real time, even breaking it down by spending category. Realizing they have to pay the balance in full each month will make them pay attention to how much they are spending. These resources are instrumental in getting your teen to remember their obligations to pay back credit cards.
Peace of Mind
Having a credit card can add a layer of financial security for both the parents and the teenager. When the unexpected happens, and it will happen, teens will have the money that they need immediately. Of course, it’s up to the parents and their teen to agree on what exactly constitutes an emergency. For example, coming up short of funds for an overnight trip with friends shouldn’t count as an emergency.
How to Get Approved for a Credit Card as a Teenager
The Credit CARD Act of 2009 limits the way that young people under age 21 can obtain credit. Generally, teens are unable to have their own credit card unless it is issued with an authorized co-signer, or they can show sufficient earned income on their own. Even with their own income, it’s very difficult for teens to get approved for credit on their own. They simply don’t have enough of a credit history for credit issuers to go on. However, there are ways to gain the necessary experience and build a history that can lead to getting approved for their own credit card.
Before teenagers can learn about credit and debt, they should first learn about saving and responsible spending. Most banks now offer teen checking accounts with access to a debit card. The account is actually set up under a parent’s name, but it can be managed separately. This option can work well if your teenager receives any kind of earnings from allowance or a part-time job. You can simply transfer funds from your account to your teen’s account, and you will be able to monitor all transactions.
With the account, your teenager has use of a debit card which gets them used to the “feel” of plastic. Most of these accounts are linked to a savings account, so your teen can be encouraged to set aside a portion of their earnings for future spending goals. Later, when they turn 21 and wants to apply for their own credit card, they will have an established relationship with a bank which is helpful in obtaining credit.
Pre-Paid Debit Cards
Similar to teen checking account debit cards are pre-paid debit cards such as those offered by Green Dot or American Express which limit spending to the amount “loaded” onto the card. The cards can be reloaded online where transactions can be monitored. You need to be a little leery of many pre-paid cards as they are laden with fees, and they may not make sense over the long run. Green Dot and American Express have reasonable fees. Although pre-paid cards won’t do anything to build a credit history, they can provide some valuable experience in the use of plastic.
Secured Credit Cards for Teenagers
Secured credit cards for teenagers look and feel just like credit cards, except their credit limit is defined by a security deposit. Any balance left on the credit card at the end of the month will be charged interest which will accrue on an unpaid balance. This may be the best option for teaching your teen about the use of credit and paying off debt.
While they can be used like a debit card or pre-paid card as a spending vehicle, you can establish the idea of a “line of credit” without much risk. Making your teenager responsible for the interest charges is one way to get their attention. It would be important to assign rules and limits such as no over-limit spending or no missed payments for which credit card privileges would be lost.
Eighteen is the minimum age to obtain secured credit cards for teens. Check with an issuing bank to make sure payments are reported to the credit bureaus. By using a secured credit card, your teen will begin building a credit payment history. At age 21, if they have been on time with payments and kept credit utilization low, the bank is likely to issue them a real credit card, or they can apply with any bank for one. It’s best to select a secured credit card from an established bank where the fees and interest charges are likely to be more reasonable.
Authorized User or Co-Sign Account
You can simply add your teenager as an authorized user of your credit card account. They are issued a separate card with their name on it and spending privileges. Most credit card accounts break out transactions by user, so you can monitor your teen’s spending. Despite this, you and your teen will have to do some separate calculations to determine his or her portion of interest charges. With most banks, the payments made by each of the users are reported separately to the credit bureaus.
Alternatively, you can co-sign on an individual account with you as the primary borrower. This provides completely separate accounting for the teenager. In either case, you will be on the hook for the debt as well as any adverse reporting to the credit bureaus.
Developing Responsibility and Accountability
Most teenagers desperately want to be treated like adults; so, as parents, we should give them every opportunity to demonstrate that they are ready. Few things are more important to teens than money, or at least being able to spend it. Therefore, teaching financial responsibility and accountability is not only an ideal opportunity to move them towards financial maturity, but they are inherently motivated to learn.
Any one of the options presented here may or may not be suitable for all teenagers. As the teacher, you need to be the judge of the level of responsibility and accountability your teen can assume.
The best way to determine how serious your teen is about learning and taking on responsibility is to set some parameters and establish benchmarks that can measure their achievements. They might include:
- Get a part-time job or have specific tasks to perform for earning an allowance
- Set up a teenager checking account
- Keep their check register up to date
- Balance their checkbook every month
- Monitor use of a debit card
- Set up a savings account and save 10% of their earnings
- Spend a couple of hours together each month going over finances
Make financial literacy and responsibility a family affair and schedule regular family meetings to discuss budgets, spending, goals and issues. When teens become an active part of the process, they not only show more interest, but they can also develop a sense of stewardship for the family finances.
Once your teenager has demonstrated responsibility, you can help them obtain a credit card as an authorized user or with a secured card. For that, you should establish a new set of parameters and guidelines, such as:
- Parents monitor the teen’s spending and payments each month
- The teen, not the parents, write the check each month that pays the credit card balance
- The teenager keep a record of the credit card purchases made during the month. When they reach the amount they can afford to pay off at the end of the month, they stop using the card
- Once a month the parents and teen discuss the choices made and the implication of those choices
- Failure to follow the guidelines or any abuse of the privilege will result in suspension of the card’s use
Final Thoughts on Credit Cards for Teens
When your teenager leaves college, they will apply for a credit card. You can only hope you have helped them build a solid foundation for managing finances because they’ll be on their own from there. The time to begin teaching them and instilling good habits is when they are teens and you really only have one shot at it. So catch them early and introduce as many lessons and tools as possible right at the time when money becomes a big issue for them.
Author: Andrew Rombach
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