Teenagers & Credit Cards
How to give your teen a credit card – and why you should.
Teenagers love to spend money, even when they don’t understand it. Whether your teen is too young for high school, taking out student loans along with other college students, or simply starting to work, credit card companies have taken notice and are doing everything to lure them in. Although laws from the Consumer Financial Protection Bureau (CFPB) prevent your kids from opening credit cards without your permission, that doesn’t stop them from bugging you constantly to get them their own card.
“Credit card companies have been pursuing teenagers and designing credit cards so they can ‘learn’ about the credit system,” says Gary Herman, President of Consolidated Credit. “And although most teenagers don’t fully understand the repercussions of using a credit card and the impact it can have on their future financial situations, more teens are working and are spending their own money. Credit card companies believe they have hit the jackpot.” That means it’s important for parents to help teenagers understand the cost of credit, how to use it wisely, and how to build credit early.
But if it’s such a risk, why get your teenager a credit card in the first place? Here are a few valuable lessons you can teach your kid more easily with a credit card:
Lesson 1: Teach them to keep their personal financial information safe.
Teenagers must be taught that a credit card is like cash and should be treated as such. If their credit card is lost or stolen, report it immediately to the credit card company or bank. Go over purchases and statements with a fine-tooth comb to make sure you authorized all purchases and that hackers do not have the card.
Lesson 2: Explain how the internet, teens and credit cards can be an unsettling combination.
The free range of the Internet combined with the purchasing convenience of a credit card can be a recipe for disaster. Monitor the sites your kids visit and the orders they place online. Teach them how to discern credible sites from scams, as hackers are constantly lurking in the shadows of the Internet. Teach them how to shop securely and what to watch out for to avoid identity theft.
Lesson 3: Teach them to delay the instant gratification
Today owning a credit card is seen as a necessity or even a rite of passage. Our teens are bombarded with messages compelling them to buy now; pay later. Teach your teens to delay that gratification and encourage them to save up to buy what they need. If they can’t afford to pay cash, then they can’t afford it! Remember your teens are watching you so use your own credit wisely.
Lesson 4: Explain the importance of a good credit history.
Your teen’s credit score determines their creditworthiness. Teenagers should be taught the importance of credit scores and the repercussions of a bad credit history. The federal government mandates that everyone can get a free credit report annually, so teach your teens how to pull their reports and how to interpret the results. You should also teach them how to check for errors and report any inaccuracies to the credit bureaus.
Lesson 5: Teach them that just because it’s offered, doesn’t mean you have to accept it.
By law, credit card companies cannot start sending preapproved credit card offers to your children until they turn 21. However, loopholes in the law mean that your teen may start to receive offers much earlier.If you or your teen decide to accept an offer and apply, be sure that credit card issuer fully discloses federal laws to your teens. Thankfully, the Credit CARD Act does prevent anyone under 21 from getting credit on their own unless they can prove that they receive income from some kind of employment. Banks are also required to reveal costs, such as annual fees and finance charges. This helps teens avoid debt traps for new credit users that have caused so many problems in the past. Make sure to teach your teen how to take preapproved offers, how to read them and how to look for catches, that could lead to financial trouble down the road.
Before you set up your teen with their first credit card, you should review some of the rules and regulations concerning young people and credit:
- To get a credit card under their own name, your teen has to be at least 18 years old.
- If your teen is under the age of 18, their only option is becoming an authorized user on one of your accounts. NOTE: Some creditors have an age limit for underage authorized users. Check with your creditor to see if you can add your teen.
- Even if your teen is over 18, since they are under 21, they will still need proof of income to qualify for most credit cards. This can come from a job, scholarships, or other methods.
With these constraints in mind, use these tips to help your teen learn more about personal finance through credit cards:
Step 1: Get your teen a checking account FIRST to help them master the basics.
“Knowing where the money is going, and keeping it within the constraints of their funds, is such an important skill to learn early in life.” – Julie Smeltzer, Fab Working Mom Life Click To Tweet
In addition to providing you the monitoring power over the account, a checking account provides your teens with hands-on financial training. Teenagers can learn how to balance their budget and track spending. This introductory course is crucial in preparing them for debit cards and credit cards. Teach them key banking terms. Good banking practices will lead to good credit practices.
Step 2: Once the training wheels are off, get a retail store or local bank credit card.
Once your teens master the basics of keeping track of money in the bank, a credit card can be introduced. Parents can apply for a joint credit card at a retail store or local bank. A student card or prepaid card may also work. Make it clear that it’s not free money and has to be paid back with interest. Give them a lesson on interest rates and how interest is calculated. Emphasize the importance of paying off the balance in full before the grace period expires. Encourage your teens to always read and understand the terms of their card. Key and important messages may be buried in there.
Step 3: Make sure they understand the purpose of the credit card.“Debt is a dangerous tool: Like a hammer or a chainsaw. It can help you if you know how to use it, but it can hurt you if you don't.” – Peter Koch, DollarSanity Click To Tweet
Your teen should know the card is reserved for emergencies or that it’s for specific purposes, such as school items, clothes, or shoes. Set a dollar amount as to how much should be spent for each purpose. Surpassing that limit should be grounds for punishment or confiscation of the card. Going over the credit limit is a telltale sign that your teen isn’t ready for credit cards.
Step 4: Have them pick up the tab.“As parents, we have to cover the basics. Anything that is not deemed a necessity should be covered with your teen's money.” – Jennifer Schreiner, Insipring Savings Click To Tweet
Typically, teens are more lax with spending your money and show more restraint when spending theirs. If your teen has a job or gets an allowance, a great way to teach them responsibility is to have them pay partial or full balances on their credit cards. Doing so will teach them how to appreciate the value of money.
Save your teens from future financial ruin
Have you or your teens gone “credit card wild” and need a way out of credit card debt? If swiping has left you drowning in debt, call Consolidated Credit for help at 1-888-294-3130. Our certified credit counselors are standing by to take your call.