Giving your teenager a credit card may seem like a scary proposition, but it could be the safest way to teach them about credit. Credit expert John Ulzheimer says it's just like teaching your teenager how to operate a car, but in a controlled environment. "Nobody would just let a teen hop in a car and drive," says Ulzheimer, who formerly worked with Equifax and FICO. "And nobody should just let their kid get a card on their own someday without some teaching by the parents."
Yet, that is exactly what many people do. The problem is, for a teen, a credit card may seem "no different from using a gift card or some other stored-value card," says Ulzheimer. And that can be dangerous. If they charge more than they can afford to repay, they might wind up dealing with years of debt and regret.
The reality is that your child will need credit to borrow money one day. If they don't build a solid credit history during high school or college, they may start their adult lives at a disadvantage. "Helping your teenager build their credit can make their life easier in the future when they go to purchase a big-ticket item on a line of credit, like a vehicle or home," says Gina McKague, president and CEO of retirement planning firm McKague Financial.
And while some financial experts like Dave Ramsey insist that nobody needs a credit score to get by in life, many argue that thinking is outdated. The reality is, good credit improves your life significantly. "Not only is establishing credit vital for obtaining something significant like a loan, but as more and more vendors exclusively accept payments via credit cards or even smartphones, it can be necessary just for buying lunch," says Jeff Motske, financial planner and CEO of Trilogy Financial in Huntington Beach, California.
Besides lenders, everyone from car insurance companies, to landlords, to employers can ask for modified versions of your credit report. They can influence your ability to get a job, an apartment, or good car insurance rates. If those aren't reasons enough to get your teen on the right track with responsible credit use, what is?
How to get your teenager a credit card
Ulzheimer says there are several ways to know if your child is ready to learn about credit. If they're already using debit cards, prepaid cards, or their phone to make purchases with your credit card information, then they're probably ready to get a credit card with your help, he says. (See also: 8 Websites to Help Your Kids Learn About Money)
Still not sure? A teenager's senior year in high school is often a good time to start. "That way, they're as mature as possible while still living under your roof," notes Ulzheimer.
Once your kid is primed and ready, the best way to introduce them to credit is by adding them as an authorized user to your own credit card account. Doing so comes with several advantages, including the fact that your own positive credit movements will be reported to your teenager's credit report. Not only that, but you will receive the bill, so you can keep tabs on their activity. Just be aware that you and you alone are responsible for repaying every charge your teenager makes.
Ulzheimer suggests teaching your kids to use credit cards only for purchases they were going to make anyway, such as gas or movies. If they have a job, you can even require that they make payments from their own money, he says.
This should be easy to do even though you're the one receiving the bill. When your statement arrives in the mail or via email, simply tally up your child's purchases and let them know what they owe. Ideally, they will also keep a record of what they paid for with credit and have the money saved to pay their share of the bill — just like in the real world.
And if you're worried your teen will fall into some bad credit habits right away, Ulzheimer suggests setting up text alerts so you know exactly when the card is being used. This way, "you can make sure they're not using the card outside the boundaries you set," he says. (See also: How to Help Your Kid Build Their First Budget)
Other ways to introduce the concept of credit
If you're not sure if your teen is ready for a credit card, you can always start them off with a prepaid debit card. "Be sure to establish some ground rules," says Motske. For example, explain what expenses the card should be used for, how long the funds on the card should last, and what criteria would cause you to revoke the prepaid card.
Many prepaid debit cards, such as the Current Card, are geared toward teens. The Current Card runs on the Visa system, so it's accepted at most merchants. Like any other prepaid debit card, you have to load funds into the account before it can be used. But the Current Card also offers enhanced features that help kids budget their money, save for a rainy day, and donate to charity. Parents are able to manage and oversee the teen's purchases with a mobile app and add money to their accounts instantly.
A regular debit card tied to a bank account can also be a good way to get the ball rolling, or it can be a transition tool between a prepaid card and a credit card. You may even want to link it to the child's own bank account, so they can only use money that's given to them or that they earn from chores or a job.
Eventually, however, you want to introduce them to credit cards by adding them as an authorized user to your account. Ideally, you'll want to do this before they leave the nest and wind up dabbling with credit on their own. "Be sure to establish a new set of ground rules with the new card, including the familial and financial consequences of not following those rules," advises Motske.
The idea of giving your teenager a credit card may be the stuff of nightmares. But it could be even scarier to imagine them learning about credit through the school of hard knocks — by racking up a huge mountain of debt or ruining their credit score by not paying their bills. (See also: 10 Credit Card Truths You Wish You Could Tell Your Younger Self)
"By educating your children early about credit and credit cards, you can hopefully help them avoid the pitfalls that so many stumble upon the hard way," says Motske.
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