Teenagers make up a considerable portion of the consumer market, and credit card companies are taking notice. Credit card companies now solicit business from teenagers younger than 18 years of age, often by offering secured or joint cards to parents. Many parents opt into such arrangements to provide teenagers with emergency funds, to offer a more convenient means of spending or even as a way of allowing teens to establish financial independence. Before handing over that plastic card, parents should be aware of the financial risks and educate teens about smart spending habits.
Options
Parents have several options for providing teens with charge accounts. For credit-based spending, add teens to your own credit card as authorized users or set up a joint account that you can regulate. If you believe it's necessary for your child to have an individual account, consider using a secured card that is linked to the teen's savings account. Debit is another option that places more limits on potential overspending. If the account doesn't have overdraft protection, your child's spending won't exceed the available funds. Similarly, a stored-value card uses prepaid funds that cannot be overdrawn.
Reasons
Deciding whether your child is ready for a credit or debit card should be a personal decision based on your family's specific values. According to Mellody Hobson, an investment expert and financial contributor to ABC's "Good Morning America," giving teens a credit or debit card is an important part of teaching financial responsibility. You should also consider your teen's primary reasons for wanting a charge card. Some teens are only interested in convenience, while others want to build credit or recognize the benefits of having emergency funds during unexpected circumstances, such as a car accident.
Dangers
Equipping teens with a charge card always comes with risks. Many youths have not developed the money management skills that help to prevent impulsive spending. Even when parents place limits on the account, the accessibility of charge cards can encourage the habit of making unnecessary purchases. Granting teens access to credit cards before they understand the details of the lending system, such as interest and repayment, makes them more vulnerable to debt, says Laura Levine, the executive director of the Jumpstart Coalition for Personal Financial Literacy.
Misconceptions
Although financial experts like Hobson advise parents to provide teens with credit cards at aged 16 as a means of teaching them financial responsibility, an early introduction to credit and debit doesn't guarantee an improved understanding of healthy spending habits. A 2008 survey performed by the Jumpstart Coalition found that youths without credit cards possessed greater financial literacy than teens with credit cards when asked questions about money management, investment, income and credit. Well-known student loan lender, Nellie Mae, also reported that incoming freshman enter college with an average credit card debt of $1,585, a consequence of offering teens financial freedom too soon.
Considerations
Parents should weigh the options and consider the maturity of each individual child before getting a teen credit card. Help teens build long-term money management skills by gradually working up to a debit card, and then a credit card. Allow teens to get a sense of financial independence by setting up a bank account with funds from an allowance or part-time job. Before graduating to a charge card, parents should discuss how credit works and the consequences of allowing a credit balance to build up. Increasing your child's financial literacy will help him to avoid getting stuck in the credit trap.
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