Once teenagers reach the age of 18, they will be able to acquire their own credit cards, regardless of whether they have learned how to monitor how much to charge based on what they can afford to pay back.
Many parents want their teens to learn fiscal responsibility while they can still monitor their spending habits. Getting your teen a credit card is one way to do this, but is it a good idea? In most cases, it depends on your child and whether he or she is ready for the world of credit. We'll provide some simple guidelines on how you can spot this readiness in your teenaged son or daughter. (To learn more about credit, read Six Major Credit Card Mistakes.)
1. Evaluate Your Kid's Responsibility Level
- Honesty is the best money policy: If your child asked you for $100 for a new calculator and school supplies, is he or she likely to come back with a few music CDs instead? Before teens get a credit card, they need to show that they can be honest about how much they're spending and what they're buying - because your maximum limit is far more than $100. (For related reading, see How To Dispute A Credit Card Charge.)
- Everyday spending: Your kids are already living within a budget and a set income level - whether it's yours or theirs. If they get a weekly allowance, they have to budget so that their money doesn't run out before the end of the week. The same goes for if they have a part-time job. If they don't get a weekly allowance or have a job, they still have to live within your budget for back-to-school clothes and other items they need or want. It's crucial that children learn to manage their everyday financial lives before they get their hands on credit. (For more, read Expert Tips For Cutting Credit Card Debt.)
- Missing deadlines: How often does your child has asked for a homework extension or leave the kitchen before the dishes are washed? If you can count recent occurrences on one hand, this is another issue that must be reconciled before your son or daughter is given a credit card.
- Six month fix: Rome wasn't built in a day and neither is fiscal responsibility. Make a list of where your child falls short in his or her responsibility level and provide six months to fix it. Make sure the lines of communication are open so that your child can ask for help.
2. Decide Between Prepaid, Secured and Unsecured Credit Cards
- Pre-paid cards: With a pre-paid card, there's virtually no risk that your will go over the limit. You can purchase one at a gas station or grocery store with a Visa or Mastercard logo or even order one from major credit card companies. They are sometimes called gift cards because they are loaded with a certain amount of money. These kinds of cards are great forays into using a credit card, but there isn't any credit reporting involved, so it will not help your teenager begin building a credit history. (For more insight on establishing credit, see How To Establish A Credit History.)
- Secured cards: Secured cards are the next level up the credit scale from prepaid cards. In this case, you put down a deposit at the bank that secures the balance. Therefore, your child can't exceed the preset limit, and credit history can be built because the bank you choose to open up a secured card with will report payment history and balances to one or more credit bureaus. You will have to cosign on the card, so remember to monitor the card closely - any missed payments will affect your credit history as well as your child's.
- Unsecured cards: If you are going to give your teenager an unsecured credit card, you must completely trust that he or she will stick to the limits you set for them. For instance, if you cosign for a card with a $5,000 limit and you let your child spend up to $1,000, he or she must stick to this limit. Be sure to set out strict consequences about what will happen if the limit is broken.
3. Monitoring Your Child's Spending
- The under-your-credit-roof law: The whole point of giving your teenager a credit card while you still have a say in how they use it is so they can learn the values of fiscal responsibility while they have guaranteed guidance. For secured or unsecured credit cards, choose banks that have daily online tracking, so you can check in on your children's spending and discuss how they are using their cards. You should also be willing to confiscate the card if your teen is unwilling or unable to stick to the agreed-upon guidelines.
Getting your teen a credit card could be a wonderful exercise in fiscal responsibility, but you need to make sure your son or daughter is ready to handle it. Evaluate your children's responsibility level before choosing what type of card - if any - you want them to have. Don't be afraid to bring your kids back two steps from an unsecured credit card to a prepaid credit card or to jump ahead from a prepaid or secured card to an unsecured credit card. Just like in their schooling, each child learns at his or her own pace.