What Scares You More: Giving Your Teenager the Keys to Your Car or Your Credit Card?
Should teenagers have credit cards?
Teenagers behind the steering wheel have always made the hearts of parents pulse with panic. No matter the age of your child, you always want to protect them from physical danger. That same sense of fear doesn’t seem to stretch into the financial realm, but it should.
|Credit Cards for Teens © CreditDonkey|
With the housing market bubble burst and deep recession of recent years, many of us have experienced first or second hand the real pain that comes with financial debt. Many of our friends and family members have had to rely on credit cards to survive hard times. While credit cards can be useful tools, credit card debt can become a slippery slope that is hard to escape.
If you have a teen who’s expressing interest in adding a certain plastic accessory to her wallet, take the time to read through these facts and figures before handing over your card. You will discover that some in-depth discussions or other payment alternatives are in order for your household.
Teen Spending Power
American teens represent a huge purchasing power, making them the target of marketers throughout the country. Bombarded by ads through radio, TV, the Internet, and mail, teens are being called to purchase the latest and greatest when it comes to fashion, entertainment, and even technology.
Easy payment methods, such as PayPal, make it simple for these teens to drain their savings without having to ask Mom and Dad for a ride to the bank. So, while you think Susie is accruing a nice little fortune with her after-school job, you may get surprised come graduation that she has nothing set aside to help with her upcoming college expenses.
Of course, you could prevent these surprises by having an open line of communication with your teens. Make time to talk about your family’s expectations when it comes to financial responsibility. And consider providing your teens with some easy access to their funds that you can monitor.
Teen Spending Options
These days, teenagers have several options for accessing money so they can have a bit of financial freedom. We’ve laid them out in degree of potential risk, from lowest to highest.
- Cash: The tried and true method that’s been used by parents throughout the ages. Agree upon a set amount that you provide your teen on a recurring basis, whether it’s daily, weekly, or monthly. Your teen then has the ability to use that cash until it has run out. This lets him practice budgeting without you having to worry that he’s blowing through all of his (or your!) savings and racking up overdraft fees.
- Prepaid debit card: When connected with a major card network, these cards are accepted at any merchant that accepts credit, making them an easy and convenient payment method for people of all ages. Look for one that’s reloadable so you can add funds as needed. When choosing a card, be sure to review any associated fees to keep it a low-cost option. Just like cash, this is a great tool for teaching your student how to budget and be responsible without facing potential overdrafts.
- Debit/ATM card: Once your teen has proven her ability to responsibly handle cash, you could allow her to get a card that is linked to her bank account. Be sure to educate her about overdraft fees and teach her how to balance her account so she knows how much is available. This option increases risk, as your teen will now have control over her funds. Talk to your bank or credit union about setting up online banking so you can keep an eye on the outgoing money.
- Authorized credit card user: You can help your mature teen take a leap into the credit card world by adding him as an authorized user on your credit card account. This will enable him to make larger purchases without having you present (which will really free up your time!). It’s a good idea to sit down with your teen and present him with rules and guidelines when it comes to using your credit card. Determine if it’s just for emergencies, if he needs to get verbal approval from you first, and the maximum amount you will let him charge at one time. Again, you will want to set up online services so you can keep a close eye on all charges.
- Cosigner: The next step into credit is cosigning on a credit card in your teenager’s name. Your teen must be 18 or older to take this step. Keep in mind that as a cosigner, you will ultimately be responsible for any unpaid debts and the account can also affect your credit history. This fact makes it even more important for you to sit down with your child to explain the costs associated with credit cards and help her understand how credit cards work. Take the time to sit down with her to review her monthly credit card bills so she can see exactly how much that new pair of shoes will really cost her if she makes only the minimum payment.
- Secured credit card: If your child who is 18 or older has a steady job, he may be able to apply for a secured credit card. Such cards are backed by money that the cardholder deposits with the credit card issuer as security for the credit card limit. Going this route may get you off the hook as a cosigner but will leave your child bearing all of the responsibility for the account. Again, it is important to educate your child about the inner workings of credit cards.
- Unsecured credit card: Even with the recent CARD Act, which places stricter underwriting policies on credit card holders under the age of 21, some teens may be eligible to receive an unsecured credit card. A teen with high enough income can get an unsecured credit card in his name. Such cards carry the highest level of risk since the holders won’t have a cosigner or secured bank account to back them up if they default on their payments. Again, it’s recommended that you guide the way with these accounts so you can help your child avoid some costly mistakes.
Teen Knowledge Level
With schools across the United States incorporating personal finance into their high school curriculum, many parents assume their teens are ready for ATM, debit, and credit cards. But oftentimes these courses must cover other life skills, limiting the amount of time that’s truly spent on personal finance topics, including credit. And, on top of that, the vast majority of teachers don’t feel competent to teach the subject.
Studies show that while teens feel fairly comfortable with many personal finance subjects, they still don’t have a firm grasp on credit cards. This lack of confidence makes it increasingly important for parents to continue the education at home. While the task may seem daunting, parents can find age-appropriate information both online and through trusted financial institutions, like banks, credit unions, and even financial planners and insurance agents. CreditDonkey has also published articles and materials to help families further their credit knowledge.
(Graphic Design by Marcelo; Additional Writing by Meghan)