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Credit card issuers aggressively reach out to teenagers and their parents with attractive first-time offers. They know that if they can lock in a new customer early in life, that could start a long and profitable relationship for them.
That’s why it’s important to understand how and when your teen learns to use credit.
Teen credit cards offer convenience and independence, but risks are also involved.
There are several things to think about when deciding if or when to get your teen a credit card for the first time. Here are several pros and cons to consider.
The Upsides of Teen Credit Cards
Teens with credit cards don’t have to carry cash and don’t need to ask mom and dad for money. In an increasingly plastic world, a card is necessary for online shopping, when traveling, and often for daily normal expenses like food and clothes.
Having a credit card also gives them more flexibility to handle emergencies or other unanticipated expenses that may pop up on short notice, perhaps to cover car repairs or medical situations.
When parents have access to statements, all purchases on the card show up on the statement, so parents know exactly where the money is going. The paper trail created by the credit card will likely discourage teens from charging things they may not be allowed to have.
Taking it easy when starting out and building a track record of responsible usage will eventually earn a parent’s trust, paving the way for less oversight.
Teens are faced with daily spending decisions, and learning how to manage money is an essential tool more than ever. Understanding discipline is the key, and with close oversight, teaching the right habits that can become lifelong practices is a manageable task.
Tracking expenses and paying bills on time will be with them for the rest of their lives, and starting early is the best way to ensure these things don’t become problems later on.
One of the main reasons teens get credit cards is to start building a positive credit history early in life. Their habits will be tracked and reported to Experian, Equifax, and TransUnion credit bureaus.
Payment history is the most important factor in FICO scores, so building a long string of on-time payments as early as possible will lead to better opportunities later on.
The other lesson a teen learns is that through responsible usage, they’ll be trusted not only by their parents but through credit line increases over time.
The Downsides of Teen Credit Cards
Lack of Discipline
If a teen cardholder goes on a spending binge, parents may not know about it until several weeks after the charges have been made and show up on a statement. Teens are experiencing the world for the first time, and their decision-making hasn’t fully formed yet, so credit card misuse is a real threat to using a card correctly.
Lack of Consequences
If parents don’t monitor the spending and take action as necessary, the teen may not feel the true effects of buying on credit. That can be the most damaging course because it sends the wrong message and sets up a teen to develop patterns of misuse.
Ultimately, parents are responsible for ensuring that the credit card is teaching their teen the right lessons about budgeting, spending discipline, and debt management. Parents must set limits and enforce the rules, or they could also suffer consequences.
Racking Up Large Debt
Unchecked teen spending can have long-term consequences, saddling a teen or their parents with huge debts that could take months or years to pay down. With interest rates hovering at 20% and higher, repaying that debt could cost thousands of additional dollars.
Damage to Credit Score
Irresponsible use does not go unnoticed. While teen cards are used for building credit when approached the right way, they can also become a dead weight that will drag down a young person’s credit score for years.
Also, racking up large debt can impact your credit utilization ratio, which is the amount you owe vs. your overall limit. A high ratio is another major tracking metric credit bureaus use, and when it’s red flag high, a teen will suffer the consequences.
Teen Credit Card Strategies
Many parents are concerned that their teens cannot handle a credit card on their own. That’s valid, which is why there are strategies parents can use to oversee their teens and credit until responsible usage becomes a habit. At this stage, it’s fair to say that supervision is vital to growing a teen’s financial IQ.
Start With a Secured Credit Card
When a teen turns 18, you can help them apply for a secured credit card. Secured credit cards work by requiring the borrower to put up a security deposit, which is used as collateral against charges made on the card.
The amount of the deposit is equal to the card’s credit limit. In other words, a $500 deposit means a $500 credit limit. When payments are made on time, the deposit is left alone. But if the borrower misses a payment, that deposit is tapped to satisfy the charges.
This is a great low-stakes way to teach a teen about tracking expenses, building a relationship with a creditor, and using a card responsibly in various situations.
Teach Them Fiscal Responsibility
Don’t assume your teen will learn lessons about money on their own. Worse yet, they could be getting bad advice from other teens or online sources that prey upon newcomers, often resulting in scams.
The most crucial money management skill to teach is budgeting. Take time to show a teen how to think long-term based on the money they earn vs. the expenses they have.
That is where Want vs Need takes center stage. They can have some things they want after paying for things they need. Using a card is not free money they’ll pay back someday.
That bill often comes due quickly, and they need to be prepared to handle it the right way when it does.
Be sure they also understand the pros and cons of responsible credit card usage. Create an environment where they can come to you with questions, and you can dialog with each other on correct use and the considerable implications that might result from improper use.