According to TransUnion, 20 percent of people who are between the ages of 13 and 18 have a credit card. However, many parents are still reluctant to give their teen a credit card. There are negatives that come along with it. For example, teens who do not use their credit cards responsibly can potentially ruin their credit at a young age. If your teen is under the age of 18, then they cannot have their own card. You will have to add them as an authorized user to one of your cards. This means that your credit will also be at risk.
It is never too early to teach a child about the virtues of proper fiscal management. It is also never too early to start establishing a good track record with lenders. A recent report from the Jump$tart Coalition states that between 56% of undergraduates in the United States have their own credit card. While you don’t want your teenager to have too much available credit, there are several benefits that can be gained by allowing your son or daughter to have a credit card in their late teenage years.
They will better understand how interest works –
It’s important that your teen understands that a credit card is a loan that carries both a principal and an interest payment each month. While the actual amount of interest paid may not be too drastic assuming you are limiting their balance to $1,000 or less, he or she will start to see how easy it can be to get into a cycle of debt because of interest alone. After a few payment cycles of seeing the principal balance go down very little or not at all, your teen will be more tempted to pay the entire balance off each month or refrain from using the card for unnecessary expenses. They will learn a very valuable lesson from all of this. You must monitor their credit use closely. You don’t want negative marks to affect their credit for years to come.
Teenagers should learn to manage their own finances –
While teenagers are not full-fledged adults, they are beginning the transition from childhood to adulthood. As part of being an adult is understanding how to budget and manage debt, it’s beneficial for your son or daughter to have a credit card of his or her own. The only way to learn how to manage money is to actually have money to manage. While mistakes may be made, limiting how much your child is allowed to borrow means those mistakes won’t be insurmountable in the long run and will become teachable moments.
A good track record with lenders is invaluable –
Having a track record with a lender is important for a teen as he or she is getting ready to go to college. In some cases, it may mean that he or she is able to get a student loan without the need for mom or dad to cosign. This means that parents don’t have to worry about possibly being on the hook for their child’s college expenses for years or even decades to come. Additionally, credit age and the number of timely payments an individual has made play a large role in determining a credit score because lenders look at your overall credit history. Therefore, it is in both the parent and the teenager’s best interest to start using credit as soon as possible in a responsible way.
Perks can help with college or living expenses –
Credit cards may offer cash back or discounts on gas and groceries. As the parent of a teenager who may be learning how to drive or going through a growth spurt, those perks may reduce the cost of raising your teen during high school or reduce costs while he or she is living at home during college.
Parent involvement creates financially responsible teens –
It is, however, important to understand that most college students end up obtaining credit cards on their own once they turn 21, so it may be wise to teach them how to use credit cards responsibly before they head off to school.
There are certain benefits in allowing your teenager to use a credit card. Not only are they convenient, but they can help your teen establish a good credit rating and history, and strong credit is crucial to your child’s future as he or she applies for car loans and mortgages. Not only does good credit help obtain these loans, but good credit scores mean lower interest rates. It may be worth considering getting your teenager a credit card if he or she is responsible, the card has a low credit limit and if you monitor his or her spending.
Giving your teen a credit card can certainly have its share of problems. Teenagers often times don’t understand that credit is a loan and not money, so they tend to max out their cards quickly. Because parents’ names are on credit cards, teenagers may have a tendency not to take full responsibility for their spending habits when using the cards since they are not under their name. Careless spending can lead to serious credit damage, so it’s important to monitor your teens spending habits very closely and make sure they are paying any balance in full each and every month. It can be scary, but with the correct amount of supervision and discussion, it can be a learning tool and stepping stone to help them in the future.
Teach good banking habits now –
Before handing a teenager a credit card, they should first have experience using a checking account of their own. They should be able to write checks, balance their checkbook, and maintain the checkbook register.
Next, they should have practice using an ATM card that only allows cash withdrawals and eventually a debit card. Finally, once your teenager has his or her own credit card, they should be writing out the monthly payments (in full) out of their own checking account, so they fully understand the connection between credit and their finances. Teach them that the credit card bill needs to be paid in full every month.
There is never a bad time for a teen to have a credit card. Your son or daughter will learn how to manage money properly, they’ll learn when it’s appropriate to use credit to make a purchase, as well as establish a good credit history. Assuming that a parent is willing to intervene and coach their teen when necessary, it can be a positive experience overall.
If your teen or college student has gotten into serious debt or needs help learning how to budget and manage their money properly, Advantage CCS can help. Contact us today for more information on our free non-profit credit counseling and debt management programs.