Should You Give Your Teenager A Credit Card?

A lot of you already do, it seems. “A 2005 study by the Jump$tart Coalition for Financial Literacy reveals that 31.8 percent of high school seniors use a credit card. About half of these students have a card in their own names and the rest use cards issued in a parent’s name.” Is this wise?

Parents have many options, a checking account with a debit card is relatively worry free, but debit cards can offer less fraud protection and then, of course, there are overdraft fees to worry about. Next, there’s the “pre-paid” credit card. It allows greater parental control, but you’ll get socked with fees for reloading the card, “inactivity fees”, enrollment fees. Ugh. So what does Bankrate recommend?

    As a first foray into credit, Minker recommends a low-limit joint credit card in the teen’s name, backed by a co-signing parent. A person younger than 18 cannot apply for a credit card without a parent’s approval, so this is a good way for a parent to monitor a teen’s card use while building a credit history for the teen.

Remember to sit down and talk with your kid about paying off their card in full each month. Lots more in Bankrate’s article. —MEGHANN MARCO

Educating teens about credit [Bankrate]

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  1. acambras says:

    There is no way in hell I would do that.

  2. Is this part of a series running here at Consumerist? Next week, Should you let children play with matches? The following week, can drunks be trusted to drive? Then, Juggling chainsaws: harmless fun?

  3. acambras says:

    The article mentions that the secured card is tied to the savings account — the limit is the amount of savings. And it helps the kid build credit. There’s a high APR, but if your kid is actually following the advice to pay in full every month, who cares? If nothing else, a high APR is a good way for kids to learn that if you charge stuff, you sometimes eventually end up paying more for it than if you paid cash.

    What’s scary is that if you don’t teach your kids about credit and financial management when they’re young (high school or, better yet, middle school), when they turn 18, they may be financially immature but they’re legally responsible for their finances (and debts). Colleges and universities routinely sell student information to credit card companies, who then make it so easy for young people to get credit cards. People in their early 20′s are starting out their careers with tremendous debts — some are overwhelmed to the point of suicide.

    So it’s important to teach kids how to manage money, but here are some things to consider:
    - Why does the kid *need* a credit card? What is the kid spending money on? Just like you should know where your kid is going on Friday night or which websites he’s visiting, you should know what he’s spending his money on. If you need to give your kid a gas station credit card, remember “Reality Bites” ($900+ in groceries charged on the parents’ gas card). Better yet, ask yourself why your kid *needs* a car (but that’s a whole ‘nother post, I guess).
    - I had a friend in high school who would buy stuff for me using her parents’ VISA, and I would give her the cash, which she then spent on god-knows-what. Just because Mom and Dad are checking the statements doesn’t mean they know what’s going on.
    - You might tell your college-aged kids to pay off their cards every month, but companies make it so EASY to carry a balance. If your balance is $500 but you only *have* to send $15 (and Christmas or spring break is coming up), which amount would you pay? Help your kid formulate a realistic budget. Even if he puts in line items for beer and condoms, at least it’s a budget.

    It’s so important to teach teens about finances and credit early, because once they’re 18, they’re in a great position to screw up their personal finances and credit rating for years to come.

  4. I got a credit card at 16 right before I went solo overseas for the first time; I was added to one of my parents’ cards. The card was strictly for emergencies — being airlifted out of Moscow for medical attention in Sweden (actually happened to someone on my trip – burst appendix), car breakdowns, that kind of thing.

    I expect many of these “kids with cards” are the same thing — an emergency card on mom & dad’s account so junior can call a cab when his designated driver is drunk, or pay the tow truck if the car breaks down on the way back to college, or unexpected expenses — I’ve definitely taken out a loan from the bank of mom & dad, which operates at no interest, when I’ve unexpectedly needed new tires or something.

    One of my cousins had sort-of what this article suggests; she got a $300 limit credit card when she started working at 16, and a money market account with check-writing. She’d write a check a month to pay off the credit card. Her parents wanted her to get a working knowledge of money and budgeting and so forth while the risk was reasonably low and they could monitor her spending.

    She paid off her mortgage by 30, so I guess it worked.

  5. kerry says:

    When I was at boarding school and college I had a credit card on my mom’s account for things that my parents agreed they would pay for, like gas for my car and books. I’ll admit I abused it a couple times, but nothing more than $100 and I paid mom back for it. I will say this, though, I didn’t get my own credit card until several years after I’d returned my mom’s card to her. They scare the crap out of me, I saw a lot of kids get their own cards and get into serious debt. 10 years later and a friend of mine is still paying off her $20,000 in credit card debt.
    I would never give my (proverbial) kid her own card in her own name that she has to pay off. That’s just asking for gargantuan debt. At least when a parent pays the bills someone will see where she’s been shopping and someone with a real income will pay the bill every month. Knowing that my mom would get the bill and get pissed if I was shopping anywhere but where we’d agreed on was enough to keep me in line.

  6. missdona says:

    I had a department store card with a low limit ($300 I think) from the time I was 15. It totally helped build my credit and teach me about paying the bills. I also got my own checking account at about that age. No debit card though, it was before debit cards were really prolific.

  7. awcrap says:

    Why isn’t there a class in high school teaching about credit, mortgages, banking, voting, taxes, 401k, IRA, job applications, and all the other things that it takes to be a responsible and smart consumer/citizen?

  8. bluegus32 says:

    I wish I had had a credit card in high school. As it was, I did not and I didn’t learn until later how to properly manage credit. When I got to college, I was bombarded with credit card offers, which I took and quickly ran up $10,000 in debt. Which for a college student is astronomical. Maybe I wouldn’t have gone so hog wild had I been properly educated on credit cards while still living with my parents.

  9. formergr says:

    As kerry says, credit cards used to scare the crap out of me too. I made it all the way through college without one, and only finally caved when I started needing it for things like car rentals, etc. Then of course it actually wasn’t too easy to get one because, you guessed it, I had no established credit (lucky enough not to need school loans). Oh, the irony.

    Thankfully, Capital One had *just* come out and was giving them to just about anyone, so that got the ball rolling for me at least. I’m sure the companies hate me though, because I’ve never carried a balance.

  10. thrillhouse says:

    Never, ever, ever. Why would you give credit to someone with no real job and no responsibility? This is a great idea.

    Teach your kids to never borrow a dime, make a budget, and pay for things with cash. You’ll reduce their future financial stress ten-fold.

    awcrap – there is a highschool cirriculum that covers at least the financial end of your list. Its called Financial Peace for the Next Generation and it needs to be taught in every HS in America.

  11. WindowSeat says:

    Better to teach your kids about credit now than wait until they get to college. Ditto with banking, mortgage info and all the other financial skills they’ll need as an adult.

  12. synergy says:

    No way. As thrillhouse said, why give that to someone with no income?? That’s insane. And since when is cash bad? It’s real easy. No interest to pay back and once it’s gone, it’s gone! That’s what my mother did. And it wasn’t in the hundreds of dollars either. It was phone and bus money (cab money later on when I was older).

  13. RulesLawyer says:

    One option you’ve missed: a pre-paid debit card. We signed up my 11-year-old daughter a couple of months ago with USAA.com, primarily because it’s increasingly rare that my wife or I use cash for anything more than $5 — it’s a debit card world for us. That’s only going to increase, and at her age, it’s time that she start learning about things like:

    - Direct deposit. She receives her allowance every two weeks, deposited to her USAA account.

    - Online bank account management.

    - Keeping track of a balance.

    - Keeping bank cards secure.

    USAA’s card has no reload, setup, or service fee. If she loses the card and reports it promptly, her liability is zero. USAA will decline charges that exceed her balance.

    If she needs cash, she can just do what we do: ask for cash back at the grocery store. A 40¢ pack of gum is less than a $1.50 ATM surcharge, and hey, you get gum with it.

    The only catches with the card that we’ve seen:

    1) The amount to reload on the card has to be at least $10.

    2) Just because stores can’t ask for ID to accept a MasterCard, doesn’t mean they don’t ask for ID, especially when someone so unusually young is trying to use a card. Fortunately, her elementary school photos came with an ID card.

    3) USAA’s terms of service say that she needs to be at least 13 years old, but the signup process asked for her date of birth, and accepted her 11-year-oldness.

    4) USAA’s web site is a challenge to navigate.

  14. major disaster says:

    I don’t understand all the people saying “don’t do it ever!!” or the perception that credit cards are by nature bad things. They’re only bad if not used responsibly, and in fact, can be used to your advantage (all you people who pay interest are subsidizing the cash back I get every month).

    If your kids are responsible, then why shouldn’t you give them a card? As others said above, it’s a good idea to teach them how to manage their own finances at a young age.

    When I was in high school, my parents gave me a card in my name, but part of their account. I still had to get permission to use it for anything that was not an emergency, and they got the bills, so if I ever went on a spending spree, they’d know about it and I’d get in trouble.

    Not all kids could handle that, but many can, so I think it’s kind of silly to say you should never do it.

  15. kerry says:

    @awcrap -
    Some schools do. My first high school (a public school) had a mandatory consumer education class. Before I started there it was a full-year course, when I came in they changed it to part of a semester-long “freshman orientation” class. Orientation was mostly watching episodes of Degrassi High, except for a month where we learned about interest rates, credit cards, and balancing a check book. I forgot almost everything by the time I actually had a checking account.
    The private school I transferred to did not, however, have such a class.

  16. awcrap: “Why isn’t there a class in high school teaching about credit, mortgages, banking, voting, taxes, 401k, IRA, job applications, and all the other things that it takes to be a responsible and smart consumer/citizen?”

    In Illinois it’s required by law to graduate — you either have to take Consumer Education or pass a test covering the same topics. (You still have to pass the test after taking Consumer Ed or you get to keep trying until you do.)

    I tested out, but from watching my friends go, it was insanely boring, poorly presented, and managed to somehow have little to no relevance to reality. They made a lot of posters. (10th graders. posters. seriously.)

    I also haven’t noticed that universal consumer education in Illinois has resulted in any improvement in our rates of mortgage default, credit card debt, bankruptcy, etc.

    http://www.isbe.state.il.us/assessment/icept.htm is the state standards.

  17. RexRhino says:

    When I was in University, I would pay my tuition and books with a credit card, and then get reimbursed by grants, scholorships, and loans, so the bill would get paid immediatly.

    Having nearly $40,000 of credit card transactions, and not paying a single cent of credit card interest, totally boosted my credit rating, and helped me later in life. I have a friend who never borrowed a cent, paid everything in cash, took no student loans and worked hard to pay his tuition while going to school: The result: no credit, which makes it difficult to buy a house or get a buisness loan, etc.

  18. Thaddeus says:

    In my opinion, no.

    Simple as that.

  19. flyover says:

    I had an ‘emergency’ card once I got my driver’s license, which I used maybe twice a year.

    If it’s a joint account it is easy for the parents to keep track of spending.
    It requires responsible parents as well as teens to oversee first credit cards.

    A good idea to start getting a credit history.

  20. kerry says:

    Eyebrows -
    Heh, yeah, that’s the class they taught at my public school, only I don’t remember a test or even being given the option of a test instead of taking the class.
    If the rapid and scary proliferation of payday loan stores is any indication, Illinois is certainly not full of financially smart people. At least, no more so than anyplace else.

  21. Papa K says:

    My wife/ her brother had a credit card under their parents name – their credit is STELLAR now and they only used it for bare necessities (groceries, gas, school – yeah, they had it easier then some people I know!).

    It’s a matter of trust, responsibility and respect. If you don’t trust your kids with a secured card, that’s your discretion, but it’s not a horrible idea to get their credit started early (and right). I wish Ohio had similar Consumer Education courses, I know too many people who dug themselves in debt with college credit cards – which I almost was, and thankfully have turned that completely around thanks to monitoring my credit reports and asking for all ‘negative’ items to be reworded/removed to make them positive.