Image by RDNE Stock Project on Pexels
By Ivan Serrano
Published November 20, 2023
A recent study found that, among those with a credit record, nearly 20 percent of Americans aged 18 to 24 have unpaid debts in collections, which is a negative sign for the financial health for this generation.
While this may seem discouraging if you’re a parent of soon-to-be adults, this doesn’t mean all minors will struggle to manage their personal finances in adulthood. Proper guidance and adequate preparation are one way you can empower your children to achieve financial independence.
This article is intended to help you think through whether giving your teen a credit card might be one step along that path to kickstart their credit journey. And, if you do make that decision, things to look out for in selecting a card for your teen.
You or your teen may have various reasons for wanting a credit card, but overall most parents want to feel confident first that their child understands how to value, manage, and spend money.
Also note that most credit card issuers will only issue a card directly to a teen once they turn 18. For younger teens, you can include your teen as an authorized user on your card instead. Most issuers have co-signer policies that allow 13-year-olds and above to be authorized users.
And even once minors turn 18, they may need to present proof of income and pass a credit check, or have an adult co-signer who can.
If you’re not sure your teen can be trusted with a credit card, you can consider giving them a prepaid card as a starting point. Prepaid cards resemble credit cards, but they function like debit cards.
With a prepaid card, also called a stored-value card, your teen won’t need to repay a monthly credit balance with interest. Instead, you’ll put a specific amount that will be their spending limit. You can reload this amount every time it shrinks. Since you won’t borrow money, your teen can’t build credit because lenders don’t report the payments to the credit bureaus.
Like credit cards, prepaid cards are issued by banks and branded by the popular credit card companies like MasterCard, Visa, American Express, and Discover.
Let’s examine some situations where you might consider supporting your teen getting a credit card.
If you have taught your teens financial responsibility since they were kids, they can apply these learnings in their teenage years. Your teen may be saving money to buy things they want or budgeting their weekly allowance using a finance tracker.
You may consider helping your teen open a credit card account once you notice these behaviors. Your teen practicing these financial attitudes might be their way of learning to be financially independent. During this phase, they tend to lessen their reliance on you for financial assistance.
Some teens misuse their credit cards, but this won’t necessarily mirror your teen’s spending habits. Getting anxious about this situation is expected, so don’t give your teen a credit card if you still feel this way. You must ensure you can fully trust them when you give them their credit card or make them an authorized user.
Without trust, you may find yourself checking your teen’s expenses all the time. It can make them feel like they’re not worthy to trust with money, potentially damaging your relationship.
Many teens want to foster financial independence through side hustles or part-time jobs. If your teen has a job that can cover their personal expenses, it could make sense for them to have a credit card.
Part-time jobs and side hustles can prompt your teen to open their own savings account or checking account to help them keep, manage, and save money.
You can ask your teen’s consent to view their bank statements to see their payment history, including deposits, withdrawals, and refunds.
With an independent source of income, the experience of handling their bank account, and a record of good financial habits in the account, you can be more at ease with your teen having a credit card.
College is a significant period in teens’ lives. Many college students temporarily move out to live in dorms, mainly when their homes are far from their universities.
While in dorms, you give them a weekly or monthly allowance that covers their school, travel, and food expenses. However, emergency expenses are sometimes inevitable. Since they’re alone and may not have immediate access to emergency funds, they may struggle to pay for an unexpected event.
Giving your teen a credit card can help them immediately address their emergencies without asking you for assistance. They also won’t have to exhaust their allowance to cover unexpected costs. This is why many banks issue student cards for college students.
However, there are restrictions on how credit cards can be marketed and issued to college-age students, generally requiring those under 21 to have either a co-signer or proof of independent income.
As a parent or guardian, you are primarily responsible for your teen’s credit card, particularly when you’re the co-signer or the one who applied for it. While you can allow them to take full responsibility, you must still prepare for the potential additional expenses.
Suppose your teen is short by a few dollars to repay their credit balance. They may ask you to cover this cost temporarily to avoid late payments. Ensure you can attend to situations like these to prevent late fees and maintain your teen’s credit score.
Part of this responsibility is keeping an eye on the balance of a card for which you are a primary cardholder or co-signer, and making sure your teen’s credit limit is set at an appropriate level to begin with (so that any overages are within your budget).
Image by Two Paddles Axe and Leatherwork on Unsplash
Allowing teens to own credit cards can teach them the value of financial responsibility. It can also be helpful in emergencies and let you monitor their spending habits.
If you have experience in choosing, applying for, and using credit cards much of this will look familiar. For instance, much of this advice can be found in our guide to choosing the best credit card and avoiding hidden dangers.
But picking a card for your teen involves new factors to consider. Here are the tips that can help you pick the best credit cards for your kids:
You must determine the credit or debit card’s purpose first. Assess whether this card is for building credit scores, teaching financial responsibility, covering school expenses, or only for use in emergencies. These assessments will guide your choices, particularly when choosing between secured and unsecured credit cards.
Secured and unsecured credit cards generally work the same, but they have a distinct difference: the security deposit. Secured credit cards require cardholders to pay an upfront security deposit, while unsecured ones—usually the traditional cards—don’t.
Credit card issuers will provide a line of credit based on credit history for unsecured cards. Meanwhile, secured credit cards are ideal for individuals without credit reports to apply for unsecured cards. Lenders will report your teen’s payments to the three major credit bureaus so they can build and improve their credit score.
Spending habits can affect your teen’s credit history. Whether they are currently an authorized user of your card or making purchases through allowances, evaluate how they handle their money. Are they more of an impulsive buyer or strict with their expenses?
Considering your teen’s spending habits is essential so you can choose a credit card with features that will prevent overspending. It can also provide insights on how they will handle their first credit card. For example, pick a credit card with low spending limits so your teen knows when to stop making purchases.
Since it’s your teen’s first credit card, picking one with a low or no annual fee is best. These cards can help you or your teen save money and avoid stress. This way, your teen won’t have to worry much about paying hefty annual fees.
Credit cards have different interest rates. Your teen may pay high or low interest for their credit balance depending on the chosen credit card issuer. Keep in mind the initial “teaser” interest rate can often be too good to be true so you’re not surprised by an increase later on.
Picking a card with low interest rates can help you and your teen avoid paying outlandish interest. Concurrently, many issuers can offer perks and rewards that encourage responsible spending habits. When your teen maintains a good credit score, they can enjoy various rewards programs, such as cash-back and travel rewards.
If one of your goals is for your teen to build a credit history, this is an important fact to know.
You can only build credit if your credit card payments are sent to the major credit-reporting bureaus in the country: Experian, TransUnion, and Equifax. Most issuers report to the credit bureaus, but if you add your teen as an authorized user or for some secured credit cards, there’s a chance their payments won’t be reported to the credit bureaus.
Credit card issuers—banks and credit unions—have different promos, offers, and programs. While it can be time-consuming, comparing their credit card programs is essential to see what offers suit your teen’s needs.
Comparisons can help you review which issuer has the best annual fees, interest rates, warranty periods, and cash-back rewards. Moreover, researching and reading reviews about each issuer is essential to see how they serve and address their clients’ concerns. That is how you’ll know the issuer’s reliability when issues arise.
Some credit cards have an intro APR for balance transfers and don’t charge foreign transaction fees. You also want to ensure that a credit card company has a mobile app with free access to FICO credit scores. FICO access lets you track your teen’s credit history to maintain good credit health.
When you give your teen a credit card, you open them to more significant financial responsibilities. It requires an elaborate and informed decision to ensure they won’t misuse and increase their credit utilization rate. You must provide the proper guidance and support so your teen can maintain good spending habits and credit history.
Remember that the best credit card suits your financial capability and your teen’s needs. Whichever credit card issuer you choose depends on your teen’s spending habits and essential finances. As such, the tips above will help you pick the card that can foster positive financial independence and secure your teen’s future.
Ivan Serrano has been been a technology and business writer since 2015. He is obsessed with our constantly evolving fast-paced society and finding ways to teach readers something new. He has worked with companies like SmallBizClub, StartupNation, Namecheap, Time Doctor, and Searcheye—which has a business relationship with FairShake.
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