The idea of giving a teenager access to their own credit card can be scary. Credit cards offer the lure of easy money when you don’t have cash, and that can be particularly tempting for a teen whose executive decision-making area of the brain has not yet fully developed.
A recent study by US News & World Report found that 40 percent of college students with credit cards hadn’t been educated by their parents on how to use credit responsibly. Credit Sesame recommends that teens understand the basics of credit card usage, including credit limits and interest rates, as well as how their credit score is determined and how credit reports work.
When considering a credit card for your teen, keep in mind that kids under 18 will not be eligible for their own credit card. The CARD Act of 2009 stipulates that applicants under 21 require a cosigner with the means to pay the debt. With most traditional credit cards, the cosigner is responsible for charges, and your credit will be affected if your teen makes mistakes.
If you think your teen is ready for a credit card, then you need to decide which kind is best for your teenager and family.
4 Types of Credit Cards to Consider:
1. Prepaid cards
Prepaid cards aren’t technically credit cards, but they deserve to be part of the conversation. Prepaid cards take some of the risk out of teaching your teen how to use a credit card because your teen can only spend up to the amount loaded on the card. Prepaid cards are ideal for younger teens or those who need some extra practice managing their spending habits before having access to their own credit card. Options for prepaid cards include Greenlight and FamZoo, both of which enable parents to manage spending and provide opportunities for teaching financial literacy.
2. Parental credit cards
You can make your teen an authorized user on your credit card. Adding an authorized user is easy to do, but there are potential risks. You are responsible for all charges your teen makes on your credit card, even if you haven’t approved them in advance. And if your teen overspends and you can’t pay the bill, both of your credit scores will be affected. It’s important that you establish guidelines and make sure your teen understands the rules before you give them access to your line of credit.
3. Secured cards
A secured card is similar to a prepaid card—both types of cards protect teens from going into debt, but the secured card enables them to develop their own credit history. Many major banks and credit cards companies offer secured credit cards with the line of credit linked to a bank account balance. With a secured card, the credit utilization ratio—the amount they spend versus the amount available (credit limit)—matters. Many experts recommend keeping the credit utilization lower than 30 percent for better credit scores. Once a teen has shown responsibility in using a secured credit card, it’s a simple process to transition to an unsecured card.
4. Student cards
Banks will issue cards to students 18 and older to help them develop a credit history. Income requirements are low and so is the credit limit. However, the interest rate is higher than a standard credit card in order to offset the bank’s risk. Your student is completely responsible for all charges made and their use of a student card will not affect your credit history. However, you won’t have access to information about card usage unless your teen provides it to you. Student cards are available from most banks and credit card companies, and some offer rewards or cash-back programs. Like secured cards, the credit utilization ratio matters for establishing a good credit score.