If you’re considering credit cards for teens and young adults but don’t even know where to start, you’re not alone. Many parents are weighing the pros and cons of giving their kids more financial responsibility and what it will look like.
To answer all your questions and more, we’ve come up with the ultimate credit card guide. So stick with us as we break down the benefits, drawbacks, and best options for teens and minors.
Benefits of Credit Cards for Teens
Teens aren’t really known for having lots of impulse control, so giving them a credit card might seem like a bad idea. But there are actually lots of benefits to it, especially when it comes to teaching them how to use credit and what it entails.
Getting a Good Financial Education
Kids and teens often don’t have access to proper financial tools or education, which can lead them to debt. But with a credit card, they can learn about the cornerstones of spending, saving, and debt.
Of course, they are going to need your help all along the way. You can teach them good credit-building habits, how to spend wisely, and what the dangers of credit cards for teens can be.
Building Credit and Developing Healthy Habits
One of the more common reasons parents consider credit cards for teens is that they want to start building credit. And the earlier they start, the better their chances are of having a good credit history.
When teens are authorized users on their parents’ cards, they can take advantage of their parents’ good credit habits, and create their own, as well. And when they’re old enough for their own cards, they’ll already have a good credit history.
In Case of Emergency
Another reason parents often consider giving their kids credit cards is that they can use them for emergencies. You never want your kids to be stranded somewhere, in need of help, but without any money. Giving them a card or authorizing access can give you peace of mind.
Guidance and Monitoring
As we said earlier, teens aren’t known for being very responsible when it comes to money. But with a safe and secure card, debit, or credit, you can oversee your teenagers’ spending at all times. And if you see any concerning spending patterns, you can put a stop to them right away.
Drawbacks of Credit Cards for Teens
As they say, with great (financial) power, comes great responsibility. Even though credit cards can be an amazing tool for financial freedom and literacy, they can also be a potential pitfall.
When teenagers are reckless with their credit cards, they can easily ruin their credit scores, which can take a lifetime to fix. Not only that but if they’re not careful, teens can easily damage their parents’ scores as well.
What’s more, another potential drawback of a card is the ability to get into debt fairly easily. When teenagers start spending on impulse without worrying about the consequences, they can quickly overspend and go in the red.
You should also consider the fact that without money coming in and the feeling of real or physical money, teens can easily get carried away. That’s why it’s so important for parents to oversee their teenagers’ spending at all times.
When Can Teens Get a Credit Card?
Now that we’ve covered the pros and the cons, let’s talk about the hows. Can teens even have their own cards? If so, when would they be able to take out one?
In most countries around the world, people can’t enter into legally binding contracts (barring exceptions) until they turn 18. The same thing goes for credit cards. Teenagers and young adults aren’t eligible for credit cards of their own until they turn 18.
And even then, between the ages of 18 and 21, they will fall under the Credit CARD Act of 2009. It states that they need someone to cosign their card or provide proof of regular income or allowance to be approved for their first credit card.
Credit Card Options for Teens and Young Adults
Even though your kids might not be able to get credit cards for teens on their own, there are still lots of options out there.
Becoming an Authorized User
Many parents or guardians opt to make their teens authorized users of their accounts. That’s one of the best ways for teens to piggyback off of the cardholder’s good credit scores and build their own.
One of the biggest benefits when it comes to authorized use is that banks and financial institutions don’t have a minimum age requirement. Younger kids, as well as teens, can get access to these accounts.
If you’re authorizing your teen to use your card, remember that you’ll still be responsible for paying off both cards.
Having a Cosigner
Applicants who are between the ages of 18 and 20 need one of two things to get a credit card: a cosigner or proof of employment or income. Having that information guarantees the institution issuing the card that the cardholder will be able to pay their bills on time. It also determines what the credit limit is going to be.
So as a parent, you should only consider becoming a cosigner if you have a decent credit history. Also, you should keep in mind that you have an equal financial and legal responsibility to pay off the balance on any card.
Now, if you fall into debt, it’ll have a negative impact on both you and your teen. You should also know that not all banks allow cosigners on credit cards, so make sure your does if you want to take advantage of this option.
Having a Secured Card
If teens/young adults don’t have the option of a cosigner available, they can look into getting a secured credit card. They would have to pay a security deposit to the card issuer, which will later become the credit card’s limit.
A secured card works much in the same way as a regular credit card, and the cardholder has to pay off the balance each month. But once the cardholder closes out the account and pays off the entire balance, they’ll get their deposit back.
Having a Student Credit Card
Student credit cards are geared towards teens and young adults in the 18–22 age range who have little to no credit history. Depending on the card and the issuer, these cards can even earn some rewards and tend to have no annual fee.
How to Prepare Your Teens for Credit Cards
Credit cards for teens are a powerful financial tool that, without the right education, can do more harm than good. It’s up to you to ensure your teens understand the gravity of the card and how to best utilize it. Here are some credit lessons to consider passing on.
Knowing How Credit Works
To the untrained eye, credit cards might seem like getting access to free money. But that’s just not how credit works.
Your kids need to understand that a credit card represents a loan, and they’re not using their own money, but the card issuer’s money. There’s also a limit to what they can borrow and an extra charge.
The interest on the cards is an extra charge for borrowing money, and if the balance isn’t paid off when the bill is due, they’ll have to pay it. The bigger the balance they carry, the more money will have to pay in interest.
Before giving them access to your cards, consider using a credit card calculator to show your teens how much interest could accrue from carrying a balance on a regular basis. You can also show them that running up a big balance and paying high interest can later keep them from meeting some financial goals.
Understanding that credit cards are loans and that not paying them off costs more than it’s worth can make your teens less likely to overspend and more inclined to make better choices.
Knowing the Difference Between Debit and Credit Cards
Before considering a credit card, you and your teens should have a good grasp on how it differs from a debit card.
A debit card provides direct access to your (or their) money. It is directly connected to a bank account with money that’s already been deposited there. So if there’s no money in the account, there’s no money on the card.
On the other hand, as we mentioned, credit cards give access to borrowed money. As long as they’re under the credit limit, they’ll be able to spend on the card, even if there is no money in the bank account.
Another big difference is that credit card information is reported to the credit bureaus and impacts credit scores. With smart and responsible credit card use, they can build their credit history and score. However, the debit card information is unlikely to have an impact on credit scores.
Knowing How to Build Credit
One of the most important things to consider before getting credit cards for teens is how to build good credit. These practices can have a great impact on their financial future.
The first step is to get a handle on bill payments as they’re what make up the FICO score, which top lenders use to make credit decisions. They’re determined by five factors:
- Payment history (35%)
- Credit usage (30%)
- Age of credit accounts (15%)
- New credit inquiries (10%)
- Credit mix (10%)
With this in mind, one easy way to improve a credit score is by avoiding late payments at all costs. Another option is charging all monthly bill payments to the credit card, assuming that you’re paying off the balance in full each month.
Another good tip on how to improve credit scores is to aim for 30% (or less) credit utilization. The term refers to the portion of the credit limit that is used at any given time. A good rule of thumb for those who can’t pay their card balances in full each month is to keep the total outstanding balance at 30% or less of the total credit limit.
To Sum Up: Credit Cards for Teens
As you can see, there’s so much that goes into considering, opening, and utilizing credit cards for teens. So if you feel like your kids might not be up to the challenge just yet, a debit card could be a good option for them.
The BusyKid Visa Debit Card for kids and teens will help give them financial freedom without the potential pitfalls that credit cards bring. It will teach them money management and how to use money that you can’t see.
The BusyKid card is safe, secure, and convenient, and parents can get up to five cards when they enroll in BusyKid. It’s an excellent teaching tool that will prepare both you and your teens for all the financial goals and challenges yet to come.
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