Is your teenager ready for a credit card? Does he or she already have a checking and savings account, managed responsibly?
Despite the potential dangers, credit cards can be good for teenagers. They can help build credit, and can start creating good financial habits. Low-limit credit cards are also great for an emergency. If your child gets stuck in another town with a flat tire, for instance, she can use a credit card to pay for the damage – even if her checking account is running low.
But don’t just go out and get any credit card for your teenager. Check out these three options for helping your teenager get credit:
1. Consider authorized user status
If you, the parent, already have good credit history and a few credit card options, consider simply adding your teenager as an authorized user. Authorized user status can be helpful for two reasons.
For one, your teenager likely has no credit history. That can make getting a regular credit card difficult – if not impossible. When you add him as an authorized user on your account, he basically gets to “piggyback” on your credit history.
Another bonus here is that with this approach, you’ll have full access to your teenager’s spending habits on the credit card. Before you give her access to your account, you will, of course, want to establish rules for how much she can spend, when she can spend, and how and when she’ll pay you back. But since you’re the primary user, you’ll have full access to any credit card statements and alerts, so you can monitor your child’s spending habits.
Speaking of alerts, you may want to consider them with this option. Most credit cards today will text or email you if they notice unusual spending. You may want to set up an alert for any time $50 or more is charged to your account, for instance. This will let you know immediately if your teenager makes a poor spending choice. You can always revoke authorized user status in this event.
Remember, though, if you make your child an authorized user on your account, you, the cardholder, are always responsible for making the payments. Just keep that in mind with this approach.
2. Look into secured cards
Another option – which won’t put your own credit at risk – is to check out secured cards for your student, such as the Applied Bank® and U.S. Bank Secured Visa® cards. These cards split the difference between credit cards and prepaid cards.
Unlike most prepaid cards, they do help build credit. But with a secured card, you’re required to put down a deposit before you get a line of credit. You might, for instance, put down $250 for a $200 credit line. So if you run up credit and default on your payments, the bank has that deposit to draw on.
Another bonus: secured cards typically come with a very low credit line. So as long as you can find a card that doesn’t allow overspending, your teenager can’t charge too much money onto a credit card account.
3. Check out student-specific cards
Older teens – those in or about to be in college – can often take advantage of credit card deals directed specifically at students. In fact, many college campuses allow a variety of credit card companies to set up booths during college enrollment days.
Since you probably know more about credit than your teenager, it’s a good idea to help him or her shop for cards before that. This way, you know they understand all the risks, rewards, fees, and terms that go with the credit card they’ve chosen.
One popular option among college students is the Discover it Student Credit Card. It offers no annual fee, a free FICO credit score with each monthly statement, no overlimit fees, and no late fee for the first late payment. And since it’s geared towards students, you don’t need great credit to get this card.
What if your teenager isn’t ready?
What do you do if your teenager hasn’t build good financial habits yet, and he isn’t ready for a credit card? Maybe you just don’t quite trust her to make good spending choices if she has credit available.
Prepaid cards operate like debit cards, only they aren’t attached to a checking account. They can include features like direct deposit, bill pay, and even check writing. And many of the latest prepaid cards offer online and mobile account access, too.
Since you’re not operating on credit, here, credit score isn’t something to worry about at all.
The real advantage of many prepaid cards, though, is that you, as the parent, can often quickly load money onto your student’s card. Cards like the Visa Buxx let parents load money onto the card online or by phone, and give parents and teens access to the account to track spending, balances, and more.
If you want your teenager to start building healthy spending habits without the risk of getting into debt, a prepaid card can be a good place to begin. And since you can load money onto these cards quickly, they, too, can be a good emergency backup, even for teens who already have a checking account.
Of course, whether you’re helping your teenager choose a credit card or a prepaid card, you’ll want to carefully go over all the account details – including fees. Then, help your child make the best choice for now, and for his or her future.