Should you give your teen a credit card? Here’s why it might or might not be a good idea.
Things change quickly once you have a teenager – first they’re able to communicate with friends via smart phone, then all of a sudden your teen has a part-time job, and before you know it they’re pulling out of the driveway in the family car.
All these milestones inch our kids towards adulthood – but should giving a teen a credit card be among them?
Giving a teen access to credit means they can buy their own gas at the pump and have a back-up in case of an emergency. But it can also mean endless opportunities to spend and the possibility of getting into debt.
So what should parents do?
There’s a lot to consider when giving teens a credit card, and the question isn’t always is your teen ready to have a card but are you, the parent, ready?
The following is a guide to help parents consider if giving your teen a credit card is a good idea. Every teen and every parent is different, so the answer will be individual depending on your situation.
Determining if a credit card is right for your teen
“Some parents say they want to give their teen a card to teach them about credit. The card isn’t going to jump up and teach your kid anything – we have to stop expecting that just because a teen has a card they’re going to learn something,” says Laura Levine of the JumpStart Coalition.
So Laura suggests the question of readiness should really begin with the parent – are you, the parent, ready to put in the time and supervision necessary?”
She also suggests that parents need to assess if their kids are knowledgable and responsible enough to have a credit card:
“We all know some 15-years-olds who can handle a credit card and we all know some 30-year-olds who cannot.”, Ms. Levine says.
The choice of whether or not to give your teen a credit card will be individual and should be seen as a reinforcement of what your teen has already learned or is learning about money, saving, and credit – but not a lesson unto itself.
The benefits of giving teens a credit card
For some teens, a credit card can be a beneficial learning experience:
Parents can coach teens: I’ll never forget a college friend who signed up for a credit card without any knowledge of how it works. She soon discovered that since she was only paying the minimum each month that debt was snowballing beyond what she could afford.
Giving teens a credit card in high school can educate them on how credit cards work and the pitfalls to avoid. With parents coaching them along the way, teens will be in a better position to enter college with eyes wide open on how to responsibly use credit cards.
Fortunately, teens under 18 can’t take out a credit card on their own and anyone ages 18-21 needs a cosigner if they don’t have their own source of income. Sharing a card with your teen gives you access to how they’ve been using the card and how well monthly balances are being paid off. Once they’re living on their own, parents won’t have the advantage of monitoring their adult child’s use of credit.
Builds a good credit history: Good credit not only means the ability to secure a credit card in the future with a low-interest rate but also means being able to take out a car loan or secure a mortgage. In addition to teaching kids how credit cards work, parents should also explain what it means to have good credit and why it’s important.
Of course, the risk in giving teens their own credit card is that it could hurt their credit history and if you’re their co-signer, it could also hurt your credit.
Your teen isn’t ready for a credit card if:
Your teen has zero money sense: If your teen hasn’t had experience with money in the past and doesn’t grasp the need to delay gratification or understand that money is limited, it’s probably not a good idea to hand them access to credit. (See below for steps parents can take to prepare teens for money management)
You don’t have the time to coach them: You’d never hand over car keys to a teen without first having them take drivers ed. classes. And unlike driving, there are few opportunities to outsource your teen’s financial education. So be honest with yourself and determine if you’re really up to the task of teaching your teen the right way to use credit.
Your teen is irresponsible: Every person and teen is different. If you’ve found it difficult to hand over responsibility to your teen in other areas of life, giving them a credit card is not a good idea (but chances are you’ve already figured this out).
How to prepare teens for using credit cards
You’ve decided you’re ready to give your teen a credit card before they leave the nest – but not so fast…There are a few steps you should take first to prepare your teen for the responsibilities of having credit:
- Practice makes perfect: Before introducing the concept of credit, teens first need to understand money mangement. Ideally, this would mean giving kids an allowance when they’re young to build an understanding of how money works and the importance of saving.
- Open a checking/debit card account: Having a checking and debit card account is an important first step before getting a credit card. Similar to an allowance, a checking account reinforces the concept of money having limits. Plus, your teen will need a checking account to pay off their credit card bills each month. Your teen can demonstrate responsibility with money management by balancing their checking account each month.
- Use pre-paid cards as a warm-up: Pre-paid credit cards can be a great way to get teens familiar with some of the basic concepts of credit cards. It also establishes a mindset of limited supply. However, the billing of pre-paid cards and debit cards is completely different than credit cards so it’s important to discuss these differences with your teen. The company FamZoo provides pre-paid cards that also let parents monitor their teens spending.
- Sit down with your teen and have the talk: It’s finally happened – you’ve determined your teen is ready for the responsibility of a credit card. But before you hand over the plastic make sure to cover a few important points:
- Interest rates: how interest accumulates on a credit card can be confusing and the area where most card holders get into trouble. This video provides a very thorough visualization of how credit card interest is calculated: How Credit Card Interest Works
- How the credit card billing cycle works: Another mystery is how companies bill customers and what happens when a credit card user carries over a balance. This video provides a good illustration of how billing works and why it’s important to pay off the balance each month: How the Credit Card Billing Cycle Works
- Why it’s important to pay in full each month: The term “minimum payment” is tricky – without any knowledge of what it means, a teen or unknowing adult might assume paying the minimum won’t result in any interest charges. But as the chart below illustrates, paying only the minimum can balloon into thousands of dollars in interest payments.
- Understand your card’s terms and limits: Parents need to fully understand the card that they’ve signed up for and pass that information on to their teen. The terms, rules, rates, and penalties of credit cards vary and it’s important to understand these differences.
- What a credit history is and why it’s important: Most newbie credit card users don’t know what a credit history is and why it’s important. This video explains how a credit score is calculated: What is a Credit Score?. It’s also worth pulling your teen’s credit score after a year or so and reviewing it together.
- The safe use of credit cards online: Discuss with your teen on which sites it’s OK to use a credit card and explain that many websites are scams and can steal credit card numbers. This article explains 8 Tips to Keep Your Cards Safe When Shopping Online. This would also be a good time to talk about identity theft and the danger in sharing your social security number online.
Tips for successfully teaching your teen the responsible way to use credit cards:
Now that your teen has a credit card, here are a few ways to make sure you’re teaching them responsible habits:
- Have your teen pay the balance: Since your teen already has a checking account, there’s no reason why they can’t pay off their credit card balance each month. This also helps them see the connection between purchases made on their card and the aggregate due.
- Encourage teens to keep track of what they’ve charged: Since it’s important to determine how close they are to their monthly limit, have your teen keep a ledger of what they’ve purchased.
- Decide which items are acceptable to put on a credit card: Some families may want to make rules about what can and cannot be charged to a credit card. No matter what, the emphasis should be on teens primarily paying through their checking account with a credit card as a backup.
- Set a limit to how much can go on the card: Similiar to what can be purchased on the credit card, some families may want to set limits to the amount teens can charge each month. Finding a card with a low credit limit can help.
- Remember your teens are watching you: Setting a good example for kids and teens isn’t always easy but can make a lasting impression. If you do make a mistake, talk to your kids about it and let them learn from it.
- Whatever you do – don’t bail them out: One of the most important steps a parent can take is to never bail out a teen who’s in debt. Of course, assuming all the steps above have been followed, the debt incurred isn’t likely to be catastrophic, and your teen should be able to pay it off with careful planning. Bailing out a teen won’t teach them the limits of money or the pitfalls of misused credit.
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