Slow and controlled approach is best.
Like water and oil, sometimes teens and plastic don’t mix. Used responsibly, credit cards can be valuable in an urgent situation and useful for establishing a credit rating. Some cards even offer attractive rewards. But mixing teenage impulsiveness with easy access to cash can pave the way to disaster. In a culture that preaches instant gratification but offers inadequate financial planning instruction, teens are at risk of getting into trouble once they start living on their own and make the transition to credit cards.
When’s the right time?
Most young people don’t grasp the difference between prepaid cards, debit cards and credit cards. It’s only once they’ve learned to handle cash that teens can start to use plastic in ways that make sense. For example, when they get a part-time job at age 16 or 17, help them open a chequing account with an ATM-accessible debit card so they can deposit, withdraw and spend their own money. If your teenager is just starting to drive, you may also want to provide him with a secondary credit card from your account to be used strictly for on-the-road emergencies only.
Prepaid gift cards for specific stores can be useful. However, prepaid credit cards should only be used to rebuild a credit rating (following bankruptcy). To many teenagers, a prepaid credit card that gets refilled is just an unlimited permit to raid Mom and Dad’s “magic money tree.”
Start with a joint credit card
When your child turns 18, consider a joint credit card with a very low limit, say $500 or $1,000, and make sure it stays low so there’s less chance of any big problems (that you would ultimately be responsible for). There are many advantages to this. Children can inherit your credit rating. Assuming your credit score is good, you are setting up your kids to have great scores by the time they want to apply for their own cards. Plus, you’ll see all the charges.
But it’s up to you to set the rules. For example, agree on how much they can spend for specific items you’re willing to cover, but everything else must be paid out of their own pockets. Schedule a time each month to sit down and go over the bill together. If they don’t have the cash to cover their charges, then you have a great opportunity to teach them about the cost of running a balance – as long as you don’t bail out any poor spending decisions.
Discuss best habits
You’ll want your children to have their own credit card before they leave home. That way there’ll be less temptation to accept all the card offers they will get at college, university, by mail, online or at the bank. Once you’ve helped them pick a single card based on interest rate, fees and benefits, you can discuss the following best credit card habits. Smart users:
- pay the entire bill every month because interest charges can become overwhelming when you only pay the minimum amount.
- pay on time because late payments or non-payments lower your credit score and can affect your ability to get a car loan or a mortgage later on. Also, some companies charge penalties and/or boost the interest rate after one or two payments are behind schedule.
- avoid cash advances because interest is charged starting on the date of withdrawal. Some cards have a higher rate of interest on advances as opposed to purchases.
- do not exceed the credit limit because most cards have penalties for doing so.
- do not reveal the credit card number to unknown vendors because credit card fraud is increasing. Hold on to the receipts for every purchase, check them against the statement, and challenge any discrepancies or unrecognized purchases immediately.
Like love, marriage, death and taxes, children will gradually learn to take responsibility for their own lives and finances. This includes the skills to handle credit cards so that they don’t form a habit of spending money they haven’t earned yet. As well as being avid consumers, today’s young people have been raised in an era when debt is considered inevitable rather than something to be avoided, especially for post-secondary students. So it’s not a surprise that lenders want to build brand loyalty as early as possible with these future borrowers. Helping your teen master credit cards 101 before sending them off into the world is wise financial street-proofing.