One of the toughest ordeals you’ll face as a parent is teaching your child to drive and then trusting that your now-licensed child is safe behind the wheel.
Right around that same time, financial experts recommend preparing for a different rite of passage that also requires trust — letting your child take a spin with a credit card.
Before your teenager or young adult takes the plunge into the world of revolving credit, here are some things to consider.
Why It’s Not Easy for Teens to Get a Credit Card
It’s tougher for teens to get a credit card than it was about 10 years ago because the Credit Card Accountability Responsibility and Disclosure Act of 2009 set rules on the extension of credit to people younger than 21. They include:
— Preventing issuance of credit cards to anyone younger than 21 without a written application that shows that the applicant can make the payments or can get help from a co-signer 21 or older.
— Prohibiting the marketing of preapproved offers to those younger than 21 without consent.
— Limiting the possibility that credit card companies can market products to students on or near campuses and at school-sponsored events by preventing the offering of gifts as a way to get students to apply.
The result is that unless teens have a source of regular income, it’s unlikely they will be able to get a card on their own.
[Read: The Best Rewards Credit Cards of 2018.]
How Young Is Too Young?
Although credit card companies don’t always have age limits on when teenagers can get credit cards on their own, it’s typical for most people to wait until age 18. However, in a 2017 survey by T. Rowe Price, about 18 percent of parents of 8- to 14-year-olds said their children had access to credit cards. Also, 54 percent of teenagers surveyed by TransUnion in 2017 said they were 14 or younger when added as an authorized user on their parents’ credit card accounts.
Experts say there is no perfect age — it depends on the teenager and his or her ability to be responsible with a credit card. But beginning the conversation and considering your options while your children are in high school can help set them on a life of positive credit experiences.
One reason to start younger with a credit card is that teens can develop better financial acumen at a younger age, says Matt Komos, vice president of research and consulting at TransUnion. “We know that credit decisions can have long-lasting impact,” he says. “The way you manage credit and overall finances affects your overall access to and the cost you pay for credit.”
The Best Ways to Prepare for a Credit Card
Some experts recommend debit cards as an ideal gateway option for teens. In this scenario, teens will have a checking account subject to review by a parent and will only have so much money to draw from when making purchases.
“You don’t want kids to have carte blanche,” says Neale Godfrey, author of “Money Doesn’t Grow On Trees: A Parent’s Guide to Raising Financially Responsible Children” and consultant. “Debit cards teach the concept of finite. That’s one of the important lessons you want.”
If a teen shows responsibility with the debit card, a credit card can be the next step.
Some teens might delay their introduction to credit cards for a while because they would rather use mobile options such as PayPal and Venmo, which can also provide helpful lessons on saving and spending. In fact, a 2017 study by the Center for Generational Kinetics found that nearly half of Gen Z survey participants — 14- to 21-year-olds — had a money or payment app on their phone.
“In today’s world, millennials and Gen Z consumers have many different options and vehicles with regard to making payments,” Komos says.
[Read: The Best Balance Transfer Credit Cards of 2018.]
Teens as Authorized Users — Good and Bad
The easiest way to introduce a credit card to your children is to let them use yours. But if you’re not careful, that could be like squirting lighter fluid near a roaring fire.
If you just hand your credit card to your child with no guidance, “it’s the bottomless pit. It gives them access to credit and cash,” Godfrey says.
One smarter option is to make the child an authorized user with limitations.
In this situation, Komos says, “the parent can still maintain control over the account, the child can use the credit card and get used to what it means have a credit card, what it means to purchase things with a credit card, what interest you can incur” and what payments can look like.
It’s important to cap the credit line for the authorized teen user, letting him or her use the credit card on a regular basis and possibly pay for it directly out of earnings from a job, Komos says.
Another option is to have a teen sign up for a secured credit card, which requires a deposit and is designed for people who don’t have any credit history or those with bad credit who are trying to rebuild their record. A bonus: These cards can help students start to develop a credit history and eventually help them qualify for an unsecured card of their own.
Why Education Is Key
Regardless of what path you choose, experts suggest that you have conversations with your children addressing the positives and negatives of credit cards while making sure they grasp the responsibility of owning or using one.
“Help them understand that if they’re not doing the right thing with this card, it could imperil them if their credit score is not maintained at a reasonable level,” says Roy Paul, executive director of Cents Ability, a New York-based nonprofit that educates and empowers high school students to help them reach their financial goals.
Cents Ability advocates for teens as young as 16 to have access to credit cards but coupled with education and oversight from parents. In a 2016 survey of 16- to 18-year-olds in New York City, Cents Ability found that 54 percent of them had access to credit cards, but 63 percent did not have conversations with their parents about money management as it relates to credit cards. Also, a 2018 U.S. News survey found that 40 percent of teens surveyed were not given proper preparation before obtaining a credit card.
Fortunately, there are many financial education sources online, including governmental agency websites, financially focused nonprofit organizations and the credit card companies themselves. One example is this teen-focused page from the Consumer Financial Protection Bureau.
Parents can also show their children what their credit card statement looks like, how large and small purchases can add up into a huge bill and why it’s important to pay off the balance every month, or at least meet the minimum payment. Also, they can review credit card repayment calculators with teens to show much longer it would take to pay off a debt by making only minimum monthly payments.
Building a Credit History
Once a teen is ready for a credit card — whether as an authorized user or on his or her own — the importance of building a positive credit history cannot be overstated.
If an initial experience with a credit card goes well, teens can be on their way to a high credit score, with an easier path to rent an apartment and buy a car in years to come. But if it goes badly, it could take a while for them — and possibly you — to climb out of the hole.
[Read: The Best Low-Interest Credit Cards of 2018.]
The goal should be to use the credit card as a way to build a positive resume of credit. Lenders look at several factors, including credit score, age of credit history, how long payments have been made on time and what your credit card balances are relative to the credit lines, Komos says.
Many credit card companies have products tailored for students. Assuming teens have a good experience with credit cards throughout college and buy cars after graduation, it puts them on track to qualify for a mortgage years later.
“By the time you’re buying a house, you might have five years of credit history under your belt,” Komos says. “That’s another benefit. It really is just about overall education.”
But with inadequate education and few, if any, budget controls set by parents, the teens and parents can then find themselves in difficult financial situations.
Teens often don’t understand their credit will be tracked, Godfrey says. “Every single financial vehicle you are involved with is now public information. If you’re going to get a job, your employer [may have] rights to go into your credit history.”
Parental Controls and Monitoring
Paul recommends a three-step educational and monitoring process for parents.
— Educate: Talk with teens about the responsibility involved with credit cards.
— Monitor: Check their payment history, and make sure they’re paying their bills on time.
— Keep talking: Make sure they’re spending wisely, and discuss situations that might negatively affect credit ratings.
When starting out, a credit line of $1,000 is plenty, even through college, Paul says. If they have more, “you’re essentially leading them down a dark hole. There is no way anyone 16 to 18 years old or in college should manage any more than a $1,000 credit line.”
If young adults get into situations where they cannot pay off a bill, a lower credit line makes it easier for parents to step in and pay the balance, he says. But parents also shouldn’t be afraid to “take that card, chop it up and say, ‘No more,'” Paul says.
That’s why education is an essential part of the introduction to a credit card, just like it is when teaching a teen to drive a car.
Godfrey says, “I’m not going to hand you the keys to the car and say, ‘You know what to do — figure that out while you’re driving and tell me how that went.’ I’m going to give you driver’s ed before you’re permitted to go behind the wheel. That’s what it’s about.”
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Is There a Right Age for Your Teen to Get a Credit Card? originally appeared on usnews.com
