Should Teens Have Credit Cards?

A teen should have a credit card in order to teach him/her about financial responsibility. Of all the subjects we learn in school, we are never taught about finances, credit, or money management. This lesson is usually left to our parents. The problem with this is that many parents are not qualified to teach their children about money management. Therefore, the children walk blindly down the financial road only to meet numerous pitfalls and debt traps. One way to combat this potential for financial failure is to teach children about money management.

I use the term “children” loosely. I am not advocating that you sit your six old down and tell him/her about interest rates, credit scores, and investment risk. Absent you child being a financial prodigy, a six year old will not understand any of these subjects. However, once your child reaches fourteen, fifteen, or sixteen, lessons about financial independence should begin. I advocate these ages because these are the ages when most teens get their first job.

Bill Gates could lecture you about “how to become a billionaire,” but none of the information will be useful unless you can put the information into action. I feel the same way about teens and credit. You could lecture your teen about how credit cards work, the importance of timely payments, credit limits, and credit scores, but until a teen actually uses the card and pays a bill, he/she will never fully grasp the principles of this important financial tool. This does not mean that you should drop a $10,000 limit gold card into your teen’s hands and tell him/her to “go nuts.” However, there are many credit cards with a $300 - $500 limit that should be used as the teaching card. This amount is high enough so that your teen could actually use it, but low enough so that if your teen has a job, he/she will not get into trouble.

The credit lesson has to be taught carefully and slowly. It is very easy to lose track of how much you are spending with a credit card. Therefore, it is vital that a teen learn that a credit card is not a substitute for cash. Meaning, if you cannot afford to buy something, you should not put it on your credit card.

Teens should have credit, but only as a privilege used as a tool for financial education. A credit card, like a driver’s license, is a privilege, not a right. Therefore, teens should first be educated, and then be allowed the privilege of credit card use. They should always start small and SLOWLY build their credit limit. As a parent, you can always monitor your teen’s credit use to insure that your teen is using credit correctly.

How to Give your Kids a Financial Head Start

Money management can be difficult regardless of your age. However, if you want to get your young ones off on the right foot, there are some strategies and tactics you can do to help them achieve financial success.

First and foremost, you, as the teacher, have to be proficient in money management. You cannot expect a student (in this case, your children, nephews/nieces, grandchildren, etc.) to follow your advice if you say one thing but do another. Make sure you practice what you preach and make sure that what you preach is helpful!

Good credit is an important asset these days. Why not get your kids off on the right foot? There are many components to a credit score (that is an article for another day), however, one such component is the length of time a credit account has been established. Currently, there is a credit score loophole that allows an authorized user to gain the benefit of the primary account holder’s entire credit history. As of recently, the Fair Isaac Corporation, the company behind the FICO credit scores, reported that it was going to stop giving these benefits to authorized users. However, adding a person as a joint account holder will give them the same benefits as the authorized user loophole used to. Therefore, I suggest that you add your child(ren) onto one or two of your credit accounts. The accounts have to be major credit cards (Visa, MasterCard, American Express, or Discover) and the accounts and your credit report have to be pristine and have to remain that way! There is absolutely no reason to add your child to a credit account that has delinquencies, late payments, charge-offs, or any other negative information. You are trying to build a good credit score for your child, not make it harder for him/her to establish credit.

Teach your kids about the stock market early. I once read a story about a family. The grandfather taught his grandchildren how to find and read stock quotes in the daily newspaper. He also taught them how to read financials so the grandchildren could have an understanding of a financially sound company. After teaching them this, the grandfather set up an individual stock account for each grandchild. Every year on the respective grandchild’s birthday, the grandfather has the grandchild pick a stock. The grandfather then buys a certain number of shares of that stock for the grandchild. Can you imagine the portfolio these kids are going to have by the time they are eighteen? Not to mention the understanding they will have of the stock market. If you can set up such a plan for your children, I would strongly recommend you do that. If you know nothing about the stock market, find somebody who does and teach your kids from an early age about the power of investment.

Kids appreciate money more when it is their own money that they are spending. Therefore, I suggest that you have your kids get a job (when they are the appropriate age). Making money for themselves will teach them what it takes to earn an honest dollar. Additionally, you can take this lesson a step further and have your kid open a savings account. Have him/her automatically deposit 10% of every check into the savings account. Make sure you find an account with a high interest rate (you may want to stay away from the major banks and look at small savings and loans that are FDIC insured or credit unions that are FDIC insured because their rates will be far higher than Wells, BofA, Wamu, Citi or any other “major” bank). By doing this, your kid will be building a nest egg and you will be able to teach your child about the power of compound interest.

Last, teach you kids the basics of good credit management. When your kid gets his/her first credit card, teach them (among other things) to pay more than the minimum payment, to not have a high balance, and if they cannot afford an item they should not buy it on a credit card. If you helped them by placing them as joint account holders on a couple of your major credit card accounts, teach them not to ruin this head start by getting in “over their head.”

These strategies will give your child a huge head start on the journey to financial success. All of the strategies are easy to initiate, and all are inexpensive to do. Help give your child the head start that you never had.