Many parents want to teach responsible money management to their kids, and that includes putting the right credit card into the child’s hands at the right time. Even for families that abhor debt, this is an essential exercise and one that takes years of preparatory lessons. A thorough understanding of credit and debit cards, along with cautions about the deceptive ease of using them, helps to dispel fear—and the probability—that their use will inevitably lead to crushing debt.
Each child’s ability to comprehend credit concepts develops at a different rate, but here are some general guidelines most of us can follow when choosing the best credit card for a teenager.
Preteens and Tweens, Age 11-13
Youth is a great time in which to learn all about budgets and spending by practicing regularly with cash and debit card purchases. Learning to spend cash is important because countless studies have shown that we are all less inclined to spend impulsively with cash than we are with plastic. One of the greatest gifts we can give young people is the ability to associate all spending with actual dollars. So don’t phase out cash completely, even if you prefer not to carry any.
Since our society relies so heavily on credit and debit cards, the child needs to understand how to manage a budget electronically. Start with a prepaid card that mom and dad fund and monitor, or a debit card attached directly to the child’s bank account (also closely supervised). Set up the account and help the child review it online weekly.
Teens, Age 14-17
Help the teen continue to develop a high degree of comfort with debit cards and online account management until they are old enough to get their own credit card (at age 18, and only with verifiable income until applicant is over 21). Some parents choose to bridge the transition with a shared credit account, adding the teen as an authorized user to an existing account, or setting up an entirely new account.
Adding a person as an authorized user has benefits and pitfalls.
- Risk of debt. Legally, this is the parent’s risk. As the primary account holder, the parent has financial responsibility and is obligated to pay off any charges made with the card.
- Credit score. This risk falls more to the teen. If the primary account holder handles the card responsibly, the teen will benefit from the positive credit history. But if the parent pays late or carries a high balance, the teen’s credit will suffer accordingly.
Young Adults, Age 18-21
Let a teen get their own credit card as soon as they are legally able. By doing so, it will help them fully separate their credit from their parents’. Options at this age are generally limited to secured cards and student cards.
A secured credit card has a credit limit equal to the amount of cash deposited as collateral against default. But it works just like a traditional credit card. The user makes purchases and must make at least the minimum payment by the due date. A consumer with a secured card should upgrade to a traditional card as soon as eligible (usually after six to twelve months of on-time payments).
Secured cards offer terms that are less favorable than those offered on standard cards, but they are not, by definition, bad. The interest rate will probably be high, but ignore interest in this context and instead focus on teaching the teen to pay charges off in full every month so that the interest rate is irrelevant.
More important is to find a card that reports to one or more credit bureaus and has a grace period during which no interest accrues. Also look at the fee structure. Many good secured cards come with a modest annual fee but few other fees. Avoid monthly maintenance fees, transaction fees, fees to check the balance, cash withdrawal fees and so on.
Student cards are traditional credit cards designed for young people and others with limited credit card experience. No cash deposit is required, and the credit limit is usually modest (possibly as low as $250 or $300). Student cards tend to be more forgiving of credit mistakes. Some cards forgive the first late payment and don’t impose a late fee. Other cards reward cardholders who make on-time payments with cash back or bonus reward points.
Credit cards are excellent tools parents can use to teach about budgeting, priorities and debt avoidance, interest, fees and reward programs. Even parents who have a history of carrying a balance should not shy away from teaching responsible credit card use to their children.
The key is to drive home the concept that credit cards must never be used to buy something the consumer wants but can’t immediately afford. Cards should only be used for purchases that will be paid off right away. The best way to become a person who can successfully handle credit cards is to regularly practice using and paying off the card so that paying the balance becomes automatic and second nature. Teaching responsible usage liberates both the child and the parent.
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