Your teenager is growing up right before your eyes and this likely means she is also exhibiting more financial independence. Even if you’ve done your best to teach her about money, you may still have one big financial lesson left to go before she heads off to college: How to use a credit card responsibly.
This article is only going to focus on credit cards and not on prepaid or regular debit cards. While the risks of using a credit card are higher than a debit card – for both you and your child – we believe the upsides of helping your child build their own credit score is worth the risk. Plus, with proper conversations about budgeting and money management, you can feel personally assured that your children understand the risk involved with credit cards.
At the same time, talking about any type of money management with your kids is challenging and uncomfortable. But, these conversations can be the first step to setting your child onto the path of proper financial health. In fact, 52% of parents felt it’s important for their kids to have their own credit cards to learn about money, according to the 2015 T. Rowe Price Parents, Kids & Money Survey. That being said, we are here to help you tackle this difficult subject. To get you started, here are three ways to explain credit card concepts to your teen:
Explain the basics. These discussions should include topics like how to pay for things using a card, as well as how to read and make sense of a credit card statement.
Be explicit about the fact that buying things with a credit card is not using free money. This is where other money lessons you’ve already taught your child come into play. It’s important that your teen truly understands that a credit card essentially allows her to borrow money that she will then pay back later. You can take this a step further by explaining that it’s important to stay within a set budget and only buy things that you can afford and pay for every month. You should also introduce the concept of interest.
Introduce the concept of using a credit card to build better credit. Although teens may not immediately grasp the importance of improving their credit score, you can explain that using a credit card responsibly will affect their ability to lease an apartment, get a cell phone contract, or take out a loan for a new car.
Once you feel your teen understands how to use a credit card, it’s time to get her one. Thanks to the Credit CARD Act, which went into effect in February 2010 to protect consumers, your child must be at least 18 to apply for a credit card and if she’s under 21, she must either provide proof of income or assets to show that she’ll be able to make payments. Short of that, you’ll either have to co-sign for your child or list her as an authorized user on your account, according to The Discover Card. Here’s a snapshot look at both of these options:
Add your teen as an authorized user on your credit card account. This is a great way for your teen to start using a credit card and learn how to spend responsibly (you can always take the card away if she spends too much). Your teen will benefit from your credit history and even begin to boost her own credit score so long as the credit card issuer reports authorized users to credit bureaus. (Call your credit card company and ask if they report authorized users to credit bureaus.)
Your teen can even get their own statement, in a way; my son is an authorized user on my account and all of his charges are broken out separately on my credit card statement. I pay my part out of my bank and his part out of his bank account.
The downside: It’s easy for a teenager to go on a spending spree and you’ll be left holding the bag in the end. That’s because the credit card account is yours and you – not your child – are responsible for paying off the debt.
Co-sign your teen’s credit card application so she can get her own credit card. If you co-sign for your teen, she will get her own credit card and build her own credit. Yet, you will both be liable for payments. In other words, if your teen can’t make payments, you will be responsible and any missed payments will negatively affect both of your credit scores. You can ask the credit card company to send duplicate statements so that you can keep track of your teen’s spending.
If you are nervous about whether your teen will run up a high balance, you may want to consider co-signing for a secured credit card. This allows you to load a certain amount of money onto the card and thus set your own credit limit, such as $500. Your teen will then be able to charge up to $500 and no more than this.
Regardless of which way you decide to go, getting your teen a credit card with her name emblazoned on it provides plenty of opportunities to continue discussing the importance of responsible spending, saving and budgeting.