Does your teen need a student credit card?
In the financial field, there is a lot of debate on the topic of teenagers and credit cards.
On one hand, some people advise that teens get credit cards so they can learn how to use them responsibly. On the other hand, some think that this is like handing a teenager a loaded gun.
I’m of the opinion that teens should learn important credit card facts. However, teens should learn important money lessons before they start using credit. That doesn’t mean you need to get a credit card for your teen, but they should be educated about credit cards so they are prepared to use them if they ever get one.
Important Note: With the new Credit CARD Act, a person must be 21 years old to get a credit card unless someone co-signs for the credit card, or they can show proof of income and ability to repay loans.
10 Facts Teens Should Know About Credit Cards
- A credit card is a contract. When you sign up for a credit card, you agree to certain terms and conditions. When you buy something, you have already agreed that you will pay them for every dollar you spend.
- Unpaid bills put you further and further behind. They lower your FICO score which may be important to your financial future. In your teenage years, you should be getting ahead financially, not falling behind.
- A credit card offer in the mail does not make you special or important. Owning a credit card does not make you cool. I remember the teen years – everything is about status. Somehow our teens are being taught that a credit card is a status of adulthood.
- The minimum payment is not what you should pay – pay the balance in full. It really sounds like the credit card company is cutting you a deal. “You owe me $150, but I’ll just take $25 for now.” Never pay the minimums. Pay your balance in full every month.
- Grace period is not an act of kindness. This is another deceptive term. Once again, they make it sound like the credit card company wants to buddy up. I’ve found that if I don’t pay the bill right away, I’m more likely to forget to pay the bill. As a result, I pay the balance when I get the bill.
- Get the right credit card for you. The best way to get a credit card is to match your needs with credit card features. This typically does not come in the form of a direct mailing. If you want a credit card, shop around and find the card that has the best features for your needs, not the logo of your favorite sports team (for example a 0% APR credit card, a 0% balance transfer, or rewards credit card).
- A higher credit limit is not the goal. In many ways, a high credit limit can be dangerous. Instead, decide how much you might need and ask the credit card company to lower your limit to that amount. Typically, a teen’s limit does not need to be above $500.
- Interest rates and fees. Credit card companies make their money by charging interest and fees. The more interest you pay, the less money you have to save towards your future. Believe me, your future self won’t be too happy if all he or she can do is pay interest.
- Never lend your credit card or credit card number. Also, credit card companies will never ask for your account information. If someone calls and asks for your credit card information, hang up the phone and dial the 1800 number on the back of the credit card. If they need something, they will help you through that number.
- People spend more money with credit cards than cash. I’ve tracked my own spending, and I agree that people do spend more with credit than cash. So why do people keep using credit cards? Basically, because credit cards have advantages over cash.
Credit Card Considerations For Parents
With the new CARD Act, a person must be 21 years old to get a credit card unless someone co-signs for their credit card o they can show proof of income. Don’t get them their own credit card and co-sign. If you do, they have the card, but you are financially liable. If you want them to have a card, add them to your account so you can monitor all their transactions. Take away their right to use the card the first time they violate a spending limit.
Alternatives if you are not comfortable with giving your teen a credit card:
- Debit card – Open an account in their name and get a debit card for that account. This way they cannot spend more money than is in the account.
- Prepaid credit card – you will have higher fees with a prepaid credit card, but at least you can control the spending.
- Teach them to use cash – there is nothing wrong with the old cash system.
Anything else you think teens should know before using a credit card? Should teens be permitted to use credit cards?