Pens, check. Calculator, check. Notebook, check. Credit card? As kids head back into the classroom, parents of teens may find themselves wrestling with a far-from-academic question: Should you let your son or daughter have a credit card? Thanks to the CARD Act, the question is now more in your hands than ever before.
Lisa Goell Sinicki, owner of a public-relations company in Peaks Island, Maine., says she added her 16-year-old daughter as an authorized user on one of her credit cards early this year so her teen would have a way to buy essentials while spending a semester away from home. The new privilege came with a discussion about responsible spending and the pitfalls of plastic.
"We basically told her if she spent on anything that she didn't have permission for, we were going to take the card away," Sinicki told WalletPop in a phone interview. When her daughter succumbed to temptation and spent $500 on clothes, Sinicki didn't take away the card, but she told her daughter she'd have to find a job over the summer to pay it off. (Sinicki says she paid the bill and let her daughter pay back the initial charges, rather than making the teen also pay for the interest charges that would accrue over a period of months.)
"She also saw how it feels to be working really hard and giving away two-thirds of your money to pay a bill," Sinicki says. What she characterizes as a minor abuse of the card turned into a valuable lesson for her teen about the consequences of overspending. "We see this as sort of practice for when she goes to college and gets a card on her own," says Sinicki, adding that her daughter hasn't bought anything without permission since the incident.
Other parents to whom WalletPop spoke expressed similar ideas: By giving teens a card while they're still under the watchful eye of Mom and Dad, any poor habits can be caught early and nipped in the bud before they spiral out of control. "Kids are going to be kids, and once they had the cards, they realized how easy it was to swipe it," says Rory Rowland, a professional speaker and consultant in Independence. Mo. Starting when his oldest son turned 16 a decade ago, Rowland co-signed cards for his kids, requesting a low limit of $500 from the bank.
Rowland says the temptation to swipe was too much for one son, who treated a group of friends to lunch during the last week of school. When confronted, Rowland says the teen was "sheepish," the thrill gone once his father told him he'd have to pay for that lunch out of his savings when the bill came. Still, Rowland says the experience was a good one.
"I'd rather them make the mistakes under my watch," says Rowland. "I didn't want my kids not to have a card, get into their 20s and then destroy their credit by overspending."
So what's the best way to go about introducing your teen to both the convenience and the caveats of credit cards? The CARD Act implemented some consumer protections that prevent issuers from marketing on college campuses and issuing cards willy-nilly, says Barry Paperno, consumer operations manager for MyFICO.com. Companies are now prohibited from marketing on or in within 1,000 feet of a college campus, and they can't use giveaways like T-shirts or water bottles to coax freshmen into signing up for an account. For consumers under the age of 21, getting a card is no longer as simple as just filling out the form. If a teen or college student doesn't have a job, they'll have to get an adult co-signer to get a card in their name. If they don't want Mom or Dad on the account, they have to have a job and provide details about their income.
In other words, parents get a little bit of breathing room, but it's not foolproof, cautions Paperno. The law doesn't require that card companies actually verify income stated by a teen, and the rule requiring a credit limit in line with a teen's income only stipulates that the cardholder be able to make the minimum payment. "You can get into plenty of trouble and still be able to make the minimum monthly payment," Paperno points out.
As a parent, what are your options? If you don't have a solid credit history or aren't in a position to help out your teen monetarily, he or she can get a secured card. These cards require you to put up your own money as a deposit, and they do charge fees, but they're reported to the credit bureaus just like any other credit card, which makes them a useful tool for building credit. While they have their flaws, they're good "training wheels" for a teen who might not have the fiscal discipline for a conventional credit card.
If your teen is responsible and if you're financially stable enough to help them out if they do slip up, you have two options, says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. You can open a joint credit card on which you and your teen are both account holders, or you can add him or her to one of your existing accounts as an authorized user.
"I recommend to parents not to open a new card and co-sign but to add their child as an authorized user," says Cunningham. "That way, you're in charge. You can monitor the account at any time, and you can take away the privilege if you need to."
Whichever route you choose, it's important to talk to your teen in detail before handing over the plastic. Cunningham recommends drawing up an actual contract with a monthly spending limit, appropriate categories of spending, and possibly even limits on categories in which you think your teen might be tempted to spend more than you think they should (clothing, music downloads and so on). Spell out who pays the bill and if the teen will be responsible for their discretionary purchases.
Also spell out the consequences if they fail. Do you want to be a one-strike-you're-out parent or a more lenient one? Cunningham points out that a young adult who goes out into the world with a so-called "thick" credit file (three or more open accounts) is better off than having no credit history, so you might want to consider the option of taking the card away for a period of time without actually closing the account.
What about who pays for any spending lapses? Do you bail them out or not? Dorothy Guzek, group manager and financial counselor at Farmington Hills, Mich.-based nonprofit debt-counseling organization GreenPath Debt Solutions, says this decision should be based on your teen's maturity level and the nature of the infraction. (A one-time movie ticket purchase is very different from a month's worth of pizza dinners.) It should certainly be discussed beforehand, and Guzek says it should not be a recurring action. "Bailing them out time after time won't teach them to become financially independent," she says.
The most important thing is to maintain a dialogue with your teens about their use of credit cards, Guzek believes. "I feel that parents should have this talk early. It really needs to happen before they leave the house for college or to move to their own place," she says. "They need to monitor what's going on. Once it gets out of control, it might be difficult to mentor the child about good spending habits."
Guzek says she sees many young adults in her office, deeply in debt, who say they were never taught how to use a credit card wisely. She urges parents to start their kids off on the right foot by displaying good credit-management habits themselves.
"Young adults watch their parents, and they can pick up good habits and bad habits," she says. "That's something even an eight-year-old is learning."
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