Teaching teenagers how to save and spend responsibly is one thing. But teaching them how to use a credit card? That presents a host of new challenges, with the potential for slipups that could have damaging long-term effects.
As a teenager, Wanda Anglin's son Skylar learned the consequences of misusing a credit card. When he turned 15 in 2008, Wanda made him an authorized user on her credit card. During that year, she monitored his charges and paid for his necessities--food, gas, and clothing--but typically had Skylar reimburse her for discretionary expenses. Judging by his good behavior with the card, Wanda thought at 16 years old, Skylar was ready to use credit without her looking over his shoulder. So she co-signed for him to get his own credit card in 2009.
So far, Skylar has made two late payments on the card: the first because he submitted the check on the day the bill was due (generally it takes three to five days for checks to clear); the second because he assigned the wrong date for the check to be delivered. Skylar says he didn't know how much the bank charged for late fees, nor was he aware interest would apply.
Fortunately, the bank agreed to waive both late fees. "I knew he would make mistakes and learn how costly the fees can be. But if he went off to college without this experience, I think he would make bigger mistakes," says Wanda, the owner of an Internet marketing company in Katy, Texas.
A number of parents like Wanda Anglin choose to make their teenager an authorized user on their credit card or help them obtain their own credit card. Yet determining whether a child is ready to manage a credit card is a decision many parents struggle with.
Due to the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, parents play a more substantial role than they did in the past in determining whether a teenager can get his or her own credit card. Prior to the CARD Act, a teenager only needed to be 18 years old to apply for a credit card. But the act requires anyone younger than 21 to either have a cosigner or verifiable income that proves they have the means to repay the credit.
With these stricter requirements in place, teenagers interested in using credit must rely on their parents. Before handing them a credit card, though, parents can gauge their child's financial responsibility by seeing how well they manage a checking account, says Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling. Many banks offer checking accounts for applicants as young as 13, and they come with monitoring tools for parents. Cunningham suggests parents get their teenager an ATM card attached to the account, so the teen can learn how to withdraw money and understand the risk of identity theft, as he or she must be cautious not to lose the card.
If the checking account is used responsibly, parents can start discussions with their teenager about credit cards. John Ulzheimer, president of consumer education at SmartCredit.com, says the first lesson should be to define what credit is. "Explain to them that this is not really money in their pocket," he says. "This is an extension of credit by a third party, who has extended the credit for the purpose of making money."
However, Ulzheimer says parents should be careful not to demonize credit cards in the process. "Be clear that when used properly, they're beneficial tools, but when used improperly, the consequences can be severe," he says.
One common reason parents help their child use a credit card is so the child can start building a good credit history. So far, Janice Christensen's son Zachary has done that, using the credit card his mother co-signed for him without any missteps. Janice, a social media and events manager in Chicago, explained to her son the implications of missing a payment or not paying the monthly balance in full. She reviews the bill statements with him, drawing attention to where it states how long it would take to pay off the account balance if he only made the minimum payment each month.
Janice says she has only seen one minor drawback. "He's a little embarrassed that he has a card because other kids don't understand credit cards," she says. "Some of his friends assume he's spoiled and entitled to money from his parents. They think when they see it, that he can just spend whatever he wants."
Despite success stories like Zachary's, there are teenagers who just aren't ready to have their own credit card. Rebeca Castro, division manager of South Florida for Apprisen, a nonprofit credit counseling agency, says she sees many young adults come in for counseling who are deep in credit card debt. Consequently, she thinks parents should add a teenager as an authorized user before co-signing for a credit card. "I would hope that the parent would take them off as an authorized user if they're using credit irresponsibly," she says, adding that it's more difficult to close a co-signed account since both the parent and the child are jointly liable to repay the debt. Ulzheimer and Cunningham also say authorizing is a better option than co-signing.
Cunningham says parents should consider that their child's teenage years are an opportune time teach them how to use credit responsibly--before they enter the job market or go off to college and get bombarded with credit card offers. Recent research reinforces Cunningham's concern. According to a survey conducted by five universities and published in April, approximately 70 percent of college students have a credit card, and more than 90 percent of them carry a balance from month to month.
According to Cunningham, the ideal time to teach children how to use credit cards is while they're still under the parents' roof, because parents are in a position to bail their child out of a bad credit situation. She warns: "The world or the creditor is not going to be as forgiving as the parents."
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