When it comes to building credit, you have to start somewhere, right? So why not start as early as possible and open up a credit card for your teenager?
Not so fast.
We all know that your credit history and the length of time that you’ve been using credit affects your credit score. But that doesn’t necessarily mean that parents should be opening up credit cards for their teenagers just to start building credit early on. Since most teens are relatively new to managing money, giving a teenager access to borrowed funds when they don’t fully understand the financial consequences can lead to disaster.
So before opening up a credit card for your teen, you may want to make sure they can pass through a few other important “financial rites of passage“ first:
Stage one: See how your teen manages a cash-based allowance. If your child is earning an allowance, how well is he or she managing their money? Is your teen blowing it all in one place or putting a chunk of those earnings away into savings? If your child doesn’t have any idea where the money is going, it may be a sign that he or she could abuse a credit card, if given the option. Paying attention to your child’s spending habits can give you some valuable insight into how they may manage a line of credit.
Stage two: Measure your teen’s ability to manage a bank account. If your teen is bringing in an allowance, it’s a smart idea to open up a checking and savings account. Not only is it a safer way to set money aside than a piggy bank, but it can also help train your teen to monitor an account balance and spend accordingly. If your teen is good at balancing a checkbook and avoiding overdrafts on the account, he or she may be ready to manage a credit card in the future.
Stage three: Test how your teen handles a paycheck from a job. Like an allowance, your teen’s paycheck (and how it gets spent) could be a good indication of how responsible he or she would be with a credit card. By instilling smart savings habits early on, your teen will be much more likely to value each dollar they earn and hopefully avoid charging too much on a credit card later on.
Stage four: Set expectations. Most teens will likely not be able to responsibly manage a credit card if they aren’t responsible for paying the bill. If you do decide to open up a credit card for your teen and you decide that you’ll be solely responsible for footing the bill, be prepared for surprise purchases and some big charges on the card. On the other hand, if your teen is required to pay for all or part of the bill, he or she may end up using the credit card more responsibly. Whatever you choose, setting expectations early on (or keeping a low credit limit on the card) can help curb any shocking charges.
