The teenage years represent the bridge between childhood and adulthood and the transition can be tough for parents and kids alike. While teens are learning to become more independent, it’s up to mom and dad to help guide them in making smart decisions. One of the most important lessons young adults need to learn before they leave the nest centers on how to manage their money. Allowing your teen to have a credit card is a good way to teach them some fiscal responsibility but it can backfire if you’re not careful. If you’re thinking of getting your teen a credit card here are some questions to consider before handing over the plastic.
Do they understand how credit works?
Credit cards are the financial equivalent of a magic wand. You go to a store and see something you like. When it’s time to pay for it, you give the salesperson your card and they give you whatever it is you want to buy. No money is actually exchanged so it seems like you’re getting something for nothing. That is, of course, until your monthly statement shows up and you find out those $100 jeans are going to cost you an extra $20 in interest.
For a teen, the concept of buy now and pay later seems fairly straightforward but making sense of fees and finance charges isn’t usually a priority. Unfortunately, the same can also be said for many adults. Before you give your teenager a credit card, you need to make sure they understand what it means to charge something and what the true cost of using credit can add up to.
How are their budgeting skills?
When teens are allowed to earn their own money, either by working a part-time job or doing chores around the house, it gives parents a great opportunity to teach them about budgeting. Having your child be responsible for paying for certain things themselves helps them to learn the value of money and how to put their needs before their wants. If your teen receives some form of income but they’re constantly asking to borrow $5 here or $10 there, it’s a good sign that they haven’t mastered the art of budgeting yet.
Before they get their hands on a credit card, it’s important that kids learn how to control their spending. Helping them open a bank account that they’re responsible for is a good first step, since they’ll have to keep track of what’s coming in and what’s going out. Being able to see where their money’s going and getting a feel for what things actually cost is a good way to prepare them for having a credit card of their own.
What kind of card is best?
Thanks to the new regulations instituted by the CARD Act of 2009, it’s much tougher for young adults to get credit cards these days. Typically, you won’t get approved for a card if you’re under 21 unless you have proof of income or a parent co-signs for you. That being said, it’s up to parents to decide if they should put themselves on the line to help their teens get a credit card. Whether you opt for a secured, unsecured or prepaid card depends on how much control you want to have over your teen’s spending.
With an unsecured card, it’s up to the card issuer to determine the credit line. If you have an unsecured card and you add your child on as an authorized user, they’ll be able to charge purchases up to whatever your credit limit is. With a secured card, you’re able to control how much can be charged to the card. You give the card issuer a set amount of money, typically just a few hundred dollars, and your teen is able to charge up to that limit. This type of card can keep your teen from overspending but they tend to have much higher interest rates than unsecured cards.
A prepaid card works similar to an unsecured card but it typically won’t affect you or your child’s credit. You simply load money onto the card and your teen can use it to make purchases just about anywhere. You won’t pay any interest for a prepaid card and it gives you the ability to put a cap on how much your teen spends.
What are the pros and cons?
There are certain advantages to giving your teenager a credit card. First, it can help them to begin building their credit history. Your credit report and credit score have a significant impact on whether or not you qualify for loans and the best interest rates. Getting your child started off on the right foot in terms of their credit can be a major plus later on when they’re to buy a car or purchase their first home.
Another benefit of allowing your teen to carry a credit card is that it can useful in emergencies. If their car breaks down and they get stranded, for example, they can use their credit card to call a tow truck or a taxi. Knowing that they have the card if they need it can give you some much-needed peace of mind.
On the other hand, cutting a 16-year-old loose with a credit card can spell financial disaster if they’re not prepared to take on the responsibility. If you co-signed for the card or you added them to your account as an authorized user, you could end up on the hook for their debts and your own credit score could suffer. In the end, it really boils down to how much the benefits outweigh the potential risks.
Photo Credit: Bill Sarris