Teens and credit cards

While many parents might think that getting their teens credit cards is a great idea, extreme caution should be used. If all you want to do is start building your teen’s FICO score, then add him/her to your credit cards. Your credit history will transfer to your teen. However, don’t give him/her a credit card from your account. If you do want your teen to have his/her own credit card, then I recommend that get them a secured credit card. [Note: Make sure you obtain the card from a reputable, FDIC insured bank or credit union.] I would not get a credit card for a teen who is not working. Otherwise, you are the one who is going to pay for whatever they charge.

With a secured credit card, your teen deposits a certain amount of money into a bank account. The bank in turn issues your teen a credit card. The limit on the card is the amount of money deposited into the account. Therefore, if your teen deposited $300, the credit card limit is $300. The money cannot be used by your teen to pay for anything or for withdrawals. It is there for the bank’s protection. If your teen does not make the payments on the card, the bank will take the amount charged out of the amount he/she initially deposited into the account. You need to let your teen know upfront that the credit card charges are his/her responsibility. They are not to let the bank pay the charges from the deposited amount because this does not help build their credit. It hurts their credit.

Explain to your teen that the entire balance on credit card must be paid a day or two before the due date on the statement. The reason for this is because if the due date falls on a weekend or holiday and your teen pays the bill on the Monday or on the next business day after a holiday, the bank considers this a late payment. Then, they will charge you a late payment fee. This happens on your cards as well. Your teen must never charge more than they can pay for when the bill comes. Your teen might feel that he can charge the full $300 because the money is the bank. However, when the bill comes due and they don’t have the full $300 to pay it off, the bank then takes their money from the deposited amount. Do not bail your teen if he or she is unable to pay the bill. They need to learn responsibility. However, if you don’t want them to ruin their credit, then you can loan them the money and set a low interest rate. Make them sign a promissory note for the amount you are covering and include late fees. This might sound harsh but this prepares your teen for the real world. No one is going to give them free money when they are adults and can’t pay their bills. [Note: To get a copy of a promissory note, you can search the web for free promissory notes or go here to download one.

Once your teen has held that credit card for awhile and has paid it correctly, he/she can then apply for a non-secured card. They can then cancel their secured card and free up the money they had deposited into the bank. Instill in your teen these correct habits and they will keep from falling into credit card debt.

By the way, if you have bad credit and want to build your credit, you too should consider a secured credit card to help rebuild your credit. Make sure you follow these tips to keep yourself from creating more damage to your credit.

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