Posted by admin on May 11th, 2009 in Money, Parenting

It’s a Loan..

In our society, we view credit cards as an alternative to cash.  But, really, when you use a credit card to pay for something you’re taking out a loan.  When we give our teens credit cards is that what we are telling them?  Clearly our current economic situation indicates that the adults in charge didn’t view credit cards as loans or we wouldn’t be in the situation we are in.  But, I digress..  This post is about credit cards and for those of you whose teen is going off to college or who has a job or car and you feel it’s an important next “step” here’s some information for you.

What the Credit Card Companies Say…

Credit cards offer convenience, but their main purpose should be to establish a good credit history so your teen can, when the time comes

* qualify for car loans and mortgages
* be able to rent an apartment
* qualify for favorable interest rates on all types of loans
* obtain lower auto and homeowners insurance premiums
* qualify for a job (employers are increasingly using credit scores when evaluating job candidates)

The best way to learn is often by doing. Having a credit card in high school can be beneficial if

* the teen is responsible
* the teen is given a credit card with a low credit limit
* parents monitor the teen’s spending and payments monthly
* parents discuss the choices made, the implications of those choices, the obvious and hidden costs with the teen
* parents make suggestions for positive changes

How Should Teen Credit Cards Be Handled?

Before teens acquire a credit card, they should have their own checking account and know how to

* write checks
* keep their check register up to date
* balance their checkbook every month

They, and not their parents, should write the check that pays the teen’s monthly credit card balance, so the teen understands the connection between cash and credit and how one affects the other.  And they  should keep a record of the credit card purchases they’ve made during the month, with a running total. When they’ve reached the amount they can afford to pay off at the end of the month, they should stop using the card until the next month rolls around.

Parents and teens should discuss what types of purchases are appropriate with a credit card.  For example, appropriate purchases do not include anything you can eat, drink, or wear or “Only for Emergencies”.

To compare offers on student credit card deals, go to BankRate’s Web site (www.bankrate.com) and search for “Student Credit Cards.” When evaluating credit card offers, get everything in writing and read all the details, especially the fine print.

Prepaid Credit Cards

Prepaid credit (or debit) cards (Visa, Discover, Mastercard)  are a good alternatives to regular credit cards for teens and can serve as a type of training wheels to ease them into using credit.   Many cards  allow parents to limit spending by funding the credit card via transfers from their checking account to the card. They can monitor their teen’s spending on the card with monthly statements or online.  One good suggestion I found is  to fund a prepaid card  with the teen’s own money (they can give you some of the cash they acquire through allowances, jobs, or gifts, and you can fund the card with it).  When choosing a prepaid card, look out for fees.   Some credit card companies nickel and dime you to death before you’ve even made a purchase.

Low-limit credit cards are another alternative. Parent’s co-sign with their teen on these cards and set a low credit limit of $200 to $300.

Personal Opinion

I don’t believe I will be giving our teenagers a credit card.  They’ve used debit cards when they traveled without us (needing a reliable way to get “emergency” cash).  Personally, I don’t see the advantage of giving a teen a credit card.  It seems to me all the skills necessary to manage money can be learned by dealing with cash.  And, really..isn’t our current economic situation due to too many people relying on credit cards and extending themselves?  It’s hard enough of adults to “rein in” the impulse for that “only on sale today” purchase.  Flirting with credit as a teen has very little benefit in my mind.  I know this will be controversial and many parents will think it’s a necessary step into adulthood but there you have it.  That’s why I don’t give advice only my opinion – everyone has to make the right decision for their own family.