Credit Cards for Kids -- Can Yours Handle One?
It's a conversation every parent dreads. Your teen has come to you and asked ... for a credit card.
What now?
If you think getting your child a credit card in high school is a way to teach financial responsibility before the onslaught of college credit-card marketing inevitably overwhelms your kid, think again.
Getting a credit card while they're under your roof isn't necessarily going to teach teens how to use cards responsibly. High school seniors who had credit cards actually did worse on the Jump$tart Coalition's personal financial literacy survey than their counterparts without credit cards.
So if you want your teen to stay debt free, the best solution may be to simply discourage him from getting a credit card.
"If a student doesn't have a credit card by the end of their freshman year in college, they're probably not going to get one," says Eric Weil, managing partner at Student Monitor.
But keeping your kid away from debt doesn't necessarily mean keeping her away from plastic. Instead of using credit cards, many students are opting to use debit cards. Between 2001 and 2008, the number of four-year college students with a debit card jumped 16 percentage points to 59%. Virtually the same number of high school seniors surveyed by the non-profit DC-based Jump$tart -- 54% -- had ATM cards.
Prepaid credit cards are another option for parents of high school students. They offer the protections of a credit card and the opportunity to build credit without the risk of debt, and holders avoid debit card-related overdraft fees. In recent years a handful of companies, including PAYjr., Allowance Card and Upside Prepaid card, started marketing cards for high school students.
The companies say they're a great learning tool for teens, who will eventually largely use plastic, rather than cash, to make payments.
"You're not going to teach your kids how to use a computer by giving them a typewriter," says PAYjr's Jessica Stroud.
But prepaid cards don't come cheap.
"Fees on them can really eat you alive," says Curtis Arnold, founder of Cardratings.com and author of FT Press' upcoming book How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line. Pre-paid card fees to watch for include load fees, monthly fees, start-up fees, ATM fees and customer service fees.
Instead, Arnold got his high school junior a checking account -- on the condition that he attend a day long financial literacy course -- and plans to get him a debit card during his senior year.
This way, he says, he'll have a year with plastic "when his mom and I can kind of guide him."
Parental guidance with a debit card helped Arkansas high-school student Jessie Burrows learn to manage her finances more responsibly. After she turned 16, her parents helped her set up a checking account with a debit card so she could manage her income from her job at fast-food chain Subway.
"I thought I was so cool, I just kind of went crazy with it," said Burrows. Seven months later she had her second overdraft fee, and her folks canceled her card.
Now 18 and about to graduate high school, Burrows keeps close tabs on her debit card purchases. She has also opened two credit cards -- with a combined credit limit of $800. Though she carries a balance of about $250, she makes payments every time she gets paid, even if it's in between billing cycles.
Making mistakes while she was younger, she says, taught her how to keep up with her accounts, now that her parents "aren't going to able to bail me out as much as they did."
But some contend that debit cards aren't credit cards with training wheels.
"Parents need to be careful about debit cards. They're a wonderful tool, but they're not training for a credit card," says Jump$tart Executive Director Laura Levine.
Debit and credit cards are very different, Levine notes: Debit cards don't require you to make payments and don't charge interest.
Getting your child any kind of plastic product -- debit, credit, or pre-paid -- should be done with caution, and only if you're going to supervise your child.
"If you're going to do this, you have to be willing to commit the time" to make sure they understand how the card works, says Levine.
"If you just hand it to your kid and see what happens, it's a very bad idea."