Teen’s First Credit Card | By Guest Author: Linda Stern, Licensed Insolvency Trustee
Teen’s First Credit Card
Credit cards are extremely convenient. And they are also the main reason why people spiral into unmanageable debt. The concepts of money and finance first become apparent to us as teenagers. Financial literacy about credit cards and healthy spending habits are best cultivated early in life. This is when we develop our own friendships and relationships along with their accompanying peer pressures. Hanging out in malls, we start to notice the value of items we would like to own. And internet shopping has made consumerism even more accessible. All this combined set off a desire in most teenagers to start working to grow their finances beyond their allowances. A credit card is part of every young adult’s horizon. Parents should therefore, time their teen’s first credit card in line with their maturity and development.
Transition Via Debit Cards
Some parents transition their teens into using credit cards by first allowing them to manage their own bank account and a debit card. It presents teenagers with an opportunity to spend money as they like, limiting it to the funds in their account. They learn valuable skills about security issues related to ATM’s and POS equipment. It also teaches them patience with saving for expensive purchases. And parents can introduce budgeting skills at this stage, which will allow them to manage cash flow for upcoming expenses like birthday gifts or vacation spending.
You may consult with a credit counsellor for useful budgeting tools and strategies to help your teenager along. While they primarily offer debt management services, you do not have to be in financial trouble to seek out their advice.
Credit Card Options
If your teen has demonstrated responsibility with a debit card, he or she may be ready for their first credit card. Generally, banks will not give credit cards to children under the age of majority. Regardless, you have options to help your teen progress along this journey.
You can add your teen to your own account as an authorized user. They will receive their own card, but all transactions will be posted to your statement. You assume the full risk of your child’s spending. Unpaid balances will impact your own credit score. Consequently, with this option, parents must actively coach their kids about payment due dates and credit limits.
A better option, if your teen has enough money saved in his or her account, is a secured credit card. Using the cash as collateral, banks will set a low credit limit which will not exceed the amount of cash in the account. Unlike a debit card or prepaid credit card, cash is not depleted from the account as they spend. Instead, the transactions are posted to a statement which your teen must pay on the due date. They will learn about paying bills on time because of the painful sting of high interest charges when they forget to do so.
Teen’s First Credit Card: Not More Money
Credit cards come with a lot of financial responsibility. With their first credit card, parents can teach their teens important concepts to influence their spending.
Right from the beginning, parents must emphasize that a credit card does not mean more money. It is simply a tool to allow them to manage their cash flow more conveniently. The “money” for use on a credit card actually belongs to the credit card company. When the paycheque is not due for a couple of weeks, a credit card allows your teen to continue to make purchases. They must set aside those borrowed funds as soon as they get paid and remit them to the credit card company when due.
Paying credit card bills on time is not only the right thing to do, it is also important for their credit reputation. At this stage, educating your teen about credit scores and credit bureaus might be appropriate. A credit card will allow them to build a positive and important long-term relationship with financial institutions.
Their credit score will influence their lives greatly down the road. Banks will rely upon this history of their spending and bill payment habits when your teen is ready for an unsecured credit card or a school loan, down the road. As they mature into adulthood, poor credit scores will greatly impact their ability to secure phone plans, rent apartments and even land some jobs. And this same credit history will follow them when they purchase their first automobile or home. They must handle credit wisely to serve them well for the long run.
Credit Card Minimum Payments
Parents must also explain the concept of minimum payments. Most credit card companies set the minimum payments at 5% of the total owing. This is the smallest amount due to keep the account in good standing. If not received on the due date, the bank will report your teen as financially delinquent, negatively impacting their credit reputation.
Furthermore, there is every reason to pay not just the minimum amount, but the full amount on the credit card bill when it is due. Unpaid balances are subject to some of the highest interest rates in the industry. The concept of partially paying off credit card bills should be reserved for emergencies only. It should never escalate to becoming a normal occurrence in anyone’s life. This is the beginning for chronic debt management problems. Putting the utmost emphasis on this issue is the best financial advice any parent can offer their teen.
Credit Utilization Ratio
Another important concept to explain to teens, like credit scores, is the Credit Utilization Ratio. While your teen’s first credit card comes with a credit limit, you should encourage them not spend to this limit. Experts recommend remaining under 30% of your credit limit. With this habit, credit bureaus will view them as responsible and credit worthy consumers. It will also help your teen avoid the high over-limit fees if they reach the limit, and then accidently go over it.
Credit Card Fees
In addition to the interest penalty and over-limit fees described above, speak to your teen about the full range of fees that accompany credit cards. These include annual fees, cash advance fees as well as foreign currency exchange fees. The latter is important to point out if your teen engages in on-line cross border shopping. You should also help them critically navigate the allure of loyalty programs and associated credit cards which promise attractive rewards.
Without doubt, the early teen years are formative for so many life lessons. Financial literacy, budgeting and good spending habits can be part of the repertoire of skills all parents can pass onto their teens when they are ready for their first credit card.
Linda Stern, a Licensed Insolvency Trustee, is a guest blogger for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family/individual support services within York region.