Teens and Credit Cards

To create a credit-wise teen, don't just hand over a credit card and wish your sons and daughters a good time at the mall or on the Internet. Make sure they know how to use — and do not abuse — credit cards.

Do not assume your children understand how credit works. You might be surprised how ignorant many teens are about credit cards. According to a recent survey reported by ABC News, 28% of teens did not know that credit cards are a form of borrowing. Just as bad, 40% did not know that banks charge interest on loans.

Still, their financial clout is awesome. Our children, ages 12 to 19, spent $141 billion in 1998. That's an average of $84 per teen per week.¹ More and more of these transactions go on plastic.

That is why, while they are still under your roof, teach your teens about credit and how to use it wisely. Here are some guidelines:

Explain how credit cards work, starting with the direct connection between charging one month and paying the next. Stress that it's a loan not free money. Also be sure to explain how interest works and how that loan can cost big bucks in compounding interest if debt is left to pile up. Most of all, stress that credit bureaus keep track of whether they pay on time. If they fall behind, your children could have difficulty getting a car loan or mortgage in the future.
Apply for an extra card under your account when you believe your children can handle the responsibility. Using your account allows you to monitor usage and prevents surprises, since your children cannot run up months of debt without your knowledge.
Set limits. Spell out the rules regarding specifically when the credit card can be used and how much can be charged. Stress that cash is generally preferable for routine purchases. The idea is to get them accustomed to the use of credit before leaving home.

If your children go to college, they will be assaulted by dozens of credit card solicitations. Remember, once they hit age 18, they can legally apply for credit on their own. Here are some survival suggestions:

Encourage them to continue using your card for at least their first year away, until they've proven they can handle credit.
When they are ready to apply for a credit card in their own name, encourage them to look for low fees and low rates and not to be tempted by teaser rates (low-ball initial rates that jump after a few months). Most of all, stress that one credit card is enough. Owning half a dozen (which too often happens) is an excellent way to get into serious financial trouble.

Credit cards are valuable, powerful tools that can help your children get through financial emergencies, conveniently make purchases and avoid many of the risks of carrying cash. Your job is to help them understand how to use these tools properly for both your sake and theirs.

^{1 A Ripe Target for Web Retailers, Teens Keep Heading to the Mall," The New York Times, September 22, 1999.}

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