Parents are increasingly allowing teens to get their own credit card. When they're used correctly, credit cards can help teens learn financial responsibility. Just be sure to prepare them with some wise tips to build good credit and prevent wild spending.
Don't Get One Just Because Friends Are
As with everything in your teen's life, peer pressure is a factor in her wanting a credit card. Don't allow her to have one just because her friends do. Tell her what she needs to know about credit cards before taking the plunge.
Think of Credit Cards as Cash
Credit cards can seem like play money. Explain that purchases with plastic really mean cash out of your teen's (or your) pocket. Otherwise, he'll be dealing with debt before he knows it.
Start with a Checking Account
A checkbook isn't as flashy as a credit card, but it can be a great way to show your teen budgeting basics. Start your teen with a checking account and debit card, then see if she's ready for a credit card.
Show Him Your Bills and Budget
This might sound scary, but showing your teen your actual bills, expenses, and monthly budget can help him understand adult finances. Sit down with him and go through the cycle of cashflow in your household. Then give him a teen budget worksheet to help track his money.
Be a Co-signer
Federal legislation now requires anyone age 18 or under to have a parent or guardian co-sign their credit card application. This means your teen's credit record is tied to yours, so there's extra incentive to educate her on credit card use.
Find a Card with the Best Terms
Research your options to find the best credit card with low interest rates, annual fees, late fees, and no hidden charges. Cards with a lower spending limit, around $1,000, attract many parents as a starter card for their child.
Set Guidelines for Use
Discuss what types of purchases and payments your teen should use his credit card for. Decide on a cap for how much he spends each month and how you'll monitor what he buys. If you're footing the bill or are a co-signer for the card, then your child should clear any purchases with you before making them.
Avoid Online Shopping Sprees
Using a credit card to shop online can make the loss of that cash seem surreal. But it will hit your teen when she gets her bill. Keep track of your teen's online buys to keep them under control.
Keep a Calendar of Payment Dates
Payment due dates can sneak up quickly. Have your teen keep a calendar of credit card payment deadlines and try to make his payment at least a week before in order to avoid late fees.
Use Her Own Cash for Payments
You're probably thinking this should be the number one rule. Parents will be happier and teens will be more independent if the cash for credit card payments comes from the teen's own pocket. So get your teen going on those chores or that job hunt!