By Samuel Bethea
- U.S. teens account for nearly $260 billion in spending annually.
- Teen credit should be used to teach responsibility and maturity (not materialism). That will pay dividends later in life.
- There are several smart ways to provide teens with credit that you can monitor without interfering on their newfound independence.
Teens and young adults always need spending money and they don’t want to keep hounding their parents for cash. Facing this prospect, plenty of debt-dubious parents wonder how best to introduce their kids to the temptations of swipe-and-sign. As with most child-rearing decisions, the best course of action depends on the individual child. Thanks to an ever-increasing number of credit and debit options, savvy parents can choose the card best suited to their teen’s temperament, financial sophistication and maturity level.
According to Piper Jaffray, U.S. teens spend nearly $260 billion a year, up from $195 billion 10 years ago. Can you imagine that? U.S. middle school and high school students–many of whom still have to be reminded to make their beds, eat their vegetables and take out the trash—spend more than some small countries do.
Like it or not, it’s a sign of the times. The U.S. economy is in its best shape in 15 years. It allows us to support early financial success by providing teens with plastic instead of cash.
When it comes to teen plastic, is it better for them to have credit cards or debit cards?
“Getting a credit card is a rite of passage,” explained Todd Mark, director of consumer relations for Consumer Credit Counseling Service of Greater Atlanta in a recent Bankrate.com interview.
For teens, the debate between giving them access to debit or credit is all about teaching them how to use credit responsibly. Just like picking up after themselves and holding a part-time job, credit and debit cards should be viewed as tools that teach values and skills. These skills will demonstrate work ethic, responsibility and other intangibles in a highly competitive job market.
There are two really big ways to help a teen with credit:
- Put your teens on an established credit line. This helps teens build an early credit history that will come in handy when it becomes time to apply for loans and manage grown-up debt.
Pros: Adding your child as an authorized user of your card should take a simple phone call to your card issuer, and your child will have his or her card to use. You can usually get a separate accounting of their charges.
Cons: The card will have your credit limits. Plus, the will be no restrictions imposed on the teen’s spending. Also, U.S. cards do not always work in foreign countries. They often have high transaction fees abroad, especially for cash advances.
- Help teens get their own debit card. In this case, the card is in the teen’s name only and is minimally funded by the parent. Some banks have cards that allow parents to monitor their teen’s spending and set reasonable limits on the card balance. Many banks and credit unions teen debit cards like these.
Pros: It may take an in-person visit to a bank to open up an account for a minor. But, then you can link the card to the parent’s account making it to easy transfer funds to your teen. The ATM card makes it easy for your teen to get cash while traveling and can be used as a credit card. If you do not sign up for overdraft protection, transactions will be denied when funds are not available.
Cons: Beware that fees can rack up if the child’s account goes negative or falls below a required minimum balance. Debit cards do not offer all the same consumer fraud protections as credit cards. They may incur overseas transaction or ATM service fees, and they require parental attention to keep adding funds.
Debit cards allow teens to gain real-time experience with credit since a debit card only works if the teen remembers to deposit enough money into the account from gifts or part-time jobs. This can be an eye-opener when they decide to stop at the local burger joint instead of taking lunch from home and end up going hungry.
When the parents support the future by placing the teen on a tradeline, they are helping to prepare their teen for the financial responsibility of obtaining their first apartment lease or auto loan a few years down the road.
The key to making this option work is not actually giving the teen access to the credit card. This seems a little tricky, but in this case, you are keeping the teen from hurting him or herself. Giving an 18-year-old a credit card with 20 years of seasoning is like giving a two-year-old the combination to the juice cabinet.
The teen gains the credit without the risk of damaging the parents’ credit rating. It’s all legal and very useful, but it ends with a happy ending.
A debit card teaches teens financial discipline, helps them regulate their spending and helps them become responsible users of debt and credit. It also shows the teen how effort and spending are related. Some adults do not learn these valuable credit lessons for many years, and for some, this lesson is never understood.
If you or someone you know needs help managing their debt, please get them in touch with folks who can help them get their debt under control.
At the Rosewood Groups , we help consumers manage their debt by negotiating with their creditors and giving them a new start. Feel call today (866) 643-0785 if you need help managing your debt.
Samuel Bethea is President of The Rosewood Groups, a small business development company, helping small business with cash flow and growth by assisting with financing and business planning.
Contact us at 307 215-8410 | www.therosewoodgroups.com