Updated: 9/14/2011 4:43 PM ET|
Does your teen need a credit card?
It's always a risk giving a teenager a card, but doing so can also teach financial responsibility. Make sure your card-carrying teen understands the right way to use credit.
Theoretically, giving your teenager a credit card can be a smart move. You can help build his or her credit scores and supervise how the card gets used while your kid is still under your roof.
But like so many other aspects of parenting, the theoretical doesn't always work in the real world. The more I observe teenagers, the more I understand why many parents would no more give their adolescents a credit card than they would hand over a loaded gun.
(My husband says what he remembers hearing most often from his parents during his teenage years was an exasperated, "What were you thinking?" The inevitable response: "I dunno.")
The problem with kids, said money expert and mom of three Janet Bodnar, is that they think like kids.
"Kids just don't get that (the card) is not money, that it's a loan," said Bodnar, the editor of Kiplinger's Personal Finance magazine and author of the book "Raising Money Smart Kids." "They will charge right up to their credit limit."
Bodnar, who didn't get credit cards for her three now-grown children, has a wealth of anecdotes about parents who did -- including the financial-services executive who was sure he'd sent his daughter off to college with a sound knowledge of how credit cards should be used.
"She called from college and said, 'I'm charged up to my credit limit. Do I get a new (card) for next month?'" Bodnar said, laughing. "You think they know, but they don't know."
A big problem with providing credit cards to kids is that it takes a lot of time to do it right: to explain the rules, go over the bills every month and enforce consequences when the kid screws up.
"That's a lot of responsibility for parents," Bodnar said, and yet another chore that has to be fit into busy lives.
And Bodnar isn't convinced all that effort will pay off.
"As long as your name is on that card, they will not take full responsibility for it," she said. "Most kids don't learn to manage their credit cards until they have to pay the cards on their own."
Then again, telling your kids to just say no to credit cards is shortsighted. Most college students have them, and using credit cards responsibly (paying on time and in full) is one of the best ways to build the sound credit scores your kids will need to rent apartments and get mortgages someday.
Bodnar suggests you tell your kids to wait until they've had several years' experience managing a checking account on their own (first with an ATM card that can be used only to withdraw cash, then with a debit card that can be used for purchases) before they apply for their first credit card. She said her children got their first cards when they were seniors in college.
"All three of my kids have good credit ratings," said Bodnar, whose children are college graduates in their 20s. "They became good credit consumers."
It's somewhat harder for college students to get a credit card since the Credit CARD Act went into effect last year. Now they're supposed to have their own income or get an adult co-signer.
But if they get turned down for a regular card, they may be able to get a secured credit card, which offers a low credit limit in exchange for a deposit of cash (typically $200 to $1,000).
If you want to get your high school teen a credit card, so you can teach him or her how to use it responsibly, you have two options:
- Co-sign a new card (preferably with a low limit).
- Add your teen as an authorized user to one of your existing cards.
The authorized user route is usually best, since you can easily remove your teen's name from the account. Closing a co-signed account takes more work.
Whether or not you get your kid a card, you should talk about the importance of good credit hygiene. The key points:
- Credit scores matter. People with bad scores have a tough time getting loans and can pay hundreds of thousands of dollars more for credit over their lifetimes. A little vigilance can save you a lot of money.
- There are no do-overs. Kids are often surprised when their mistakes aren't instantly forgiven, so they need to know that a single missed payment can knock more than 100 points off their credit scores and stay on their credit reports for seven years.
- There's no excuse for carrying credit card debt. Tell your kids to ignore the "minimum payment due" number. That's what suckers pay. Smart credit users pay their credit cards in full every month.
- Don't charge more than 10% of your limit. On a low-limit card, that can be a pathetically small amount. But your kids should view this card solely as a vehicle for building credit, and that means using it lightly.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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You know, there's nothing wrong with a teen having a credit card IF and ONLY IF your kid is prepared for it. I'm 33 years old and I got my first credit card when I was 14 and went overseas as an exchange student. Even at age 14, I knew EXACTLY how credit cards worked and why I should never charge more than I could afford that month. I came home having used the card a few times for safety's sake (exchange rate issues), but with a zero balance because I promptly paid them.
I grew up on a farm and worked my tail off for a small hourly wage doing farm work. I got a job outside the home when I was 16 and worked 25 hours a week in high school to save for college. I put myself through college and worked nearly full time so that I only had to borrow money for tuition. Today, I'm completely debt free and own my own home and my credit rating is over 800.
Parents need to understand that they have to put in the time and effort to teach their children finance. Having a job and making them pay some of their own expenses, even in high school, is also a great motivator for a kid to learn. Sadly, most parents pamper their kids and never make them work, then expect them to magically understand bills when they head to college. I'm thankful that my parents taught me how to work hard and pay my own way.
Parents, if your kids have a job, and they are somewhat responsible, getting them a secured card (or co-signing for one) is a great way to help them out. They will be able to build credit history, and may not need you to co-sign on larger purchases, such as vehicles or their first apartment.
I don't like the idea of getting teens credit cards. For every 1 that derives a benefit, 10 will get into trouble.
It is natural to extrapolate that adults who have poor credit card habits are in a bad position to teach their children how to manage credit cards responsibly.
Besides, credit cards and banks are inherently evil. Let's not help the banks drive younger generations into indentured servitude.
Someone (plkfish) - YOU ARE SO RIGHT ! ! ! WELL SAID.
I also have two sons and did exactly the same thing...even co-signed their first car leases and car insurance in their names as well...at 21 and 23 they both know the most important thing is their last name and having good credit as well as being responsible with it.
In my generation and even through today, parents feel they should and need to give, give, give; rather than teach, teach, teach -- especially when it comes to personal fiscal obligations.
I agree with Lydia. This article isn't fair to group all teens. Granted, I'm not a teenager anymore, but then again, I'm not that far from a teen. I got my first credit card when I was 18 and I knew how credit cards work and I very aware that credit cards are loans. Now I'm 22 and I have a credit score of over 715. Not to mention, if these teengares don't know how credit cards work, whose fault is that? Just like the bird and the bees, educate your kids before you decide to hand them over a credit card.
Also the people who are saying who needs credit cards and credit are just plain stupid. Yes we don't need credit cards but its a great way to build credit, which you do need. Ever plan to buy a house, a car and take a loan out to buy those things and more? Well you need credit for it and without credit, you can't buy much nowadays.
Why in the world is this article more than one word long?
"DOES YOUR TEEN NEED A CREDIT CARD?
Never mind the use of the word "need" (because they certainly do not need one), there are better ways to teach your offspring financial awareness that won't **** them over years from now when they discover the wonders of unpaid bills/why you don't only pay interest on things. What's wrong with a debit card or similar account? Disable overdraft "protection", and you can't spend what's not there, which seems like a much healthier way to treat one's finances.
Not no but Hell no! Teaching a child to go into debt isn't smart at all. Teaching him to stay out of debt is what you should strive for. Money management, savings goals, and "real cost" are things a kid should be taught. Not instant gratification. Teach them to break away from the American mindset where "gross indebtedness is a competitive sport".
I like the young person's idea of having a debit card that can't be overdrawn. However, I think that having to whip out a credit or debit card to buy a $.95 pack of chips is a bit much but I've seen it.
Would you give a gun to a serial killer?
Would you give a fox a baby duck to raise?
Just about as dumb as a kid having a credit card!
Unless you are loaded because the child will take advantage of the situation to "Get away with something" a few times b/4 the boom is lowered and the bag will be yours to hold..
You really can't fix stupid I guess.
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