credit cards

Educating teens about credit

"People have to learn this stuff sometime," says John Parfrey, director of the High School Financial Planning Program for the National Endowment for Financial Education, or NEFE. "Managing credit is all about establishing those healthy habits and patterns early."

Mark agrees.

"If you're letting your kid under 18 use a credit card, make sure you're teaching them the skills of spending and then paying off in full immediately," he says. "That's Credit 101."

There are three ways to go: You can get a joint credit card, which means you and your child are jointly responsible for the debt; you can get a secured credit card, which is tied to the teen's savings account, or you can make your teen an authorized user, which means you, not your child, are responsible for the debt.

Joint credit card 
As a first foray into credit, Minker recommends a low-limit joint credit card in the teen's name, backed by a co-signing parent. A person younger than 18 cannot apply for a credit card without a parent's approval, so this is a good way for a parent to monitor a teen's card use while building a credit history for the teen.

Though the joint arrangement allows parents to keep a rein on the card's limit, Junior should be responsible for paying the bill in full. "That forces him to start thinking about having enough money set aside by the end of the month," Minker says.

Once the statement arrives, or whenever you track card activity online, he advises, "sit down with your kid for 10 minutes and go over what was spent." Ideally, he says, "the teen wouldn't be using the card for clothing or food; it'd be used in case of an emergency, or to finally buy something they've been saving up for."

Mark concurs: "They shouldn't be using it as a short-term loan or as a way to leverage their lifestyle."

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All of this training is undercut, however, if parents "swoop in and save the kid" from the consequences of overspending, says Minker. "I'd much rather have my daughter fall on her face while she's under my roof -- but if I bail her out every time, that sends the wrong message."

Secured credit cards 
Another option is a secured credit card tied to the teen's savings account. The card's limit is usually equal to the teen's savings account balance. If the teen misses a monthly payment, the bank takes it from the savings account. This type of card also helps build a credit history. The downside of a secured card is that the annual percentage rate, or APR of interest is high, between 13 percent and 24 percent. Credit unions often have lower APRs, so it's worth shopping around.

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