credit cards

Educating teens about credit

Authorized user 
Finally, there's the option of making your teen an authorized user of your credit card. It's convenient, it's easy, it's commonly done -- but it could result in a megasplurge, potentially putting your budget, and good credit score, at risk. Here again, "supervision is the key," says Minker.

As with the joint card, parents need to review and discuss monthly credit card statements with their teen, says CCCS's Mark, and all parties should be monitoring expenses. "The kid should be keeping track of all his or her spending, rather than waiting to be told at the end of the month what he owes."

When a parent authorizes a teenage child to use a card, the credit bureaus will report the use of that card under the parent's name as well as the teen's name. This enables the teen to establish a credit history by piggybacking on the parent's good credit history. And the reverse is true as well: If a parent has a poor credit history, the teen will start his or her financial life with a poor credit history. Because children under the age of 18 can't legally enter into a contract, the parent is the one who's legally responsible for the debt.

With a joint card, the teen's actions are more likely to accrue to her own nascent credit record. That's both the good news and the bad news. "There is a danger of a teen getting off on the wrong foot with their credit rating, if the kid is not well-trained and uses the card unwisely," says Minker.

To that end, jittery parents can also take heart from surveys showing that many kids understand the pitfalls of plastic. Teenage Research Unlimited's 2004 survey found that 38 percent of youngsters between 12 and 19 feel that credit cards should be used only by adults, and only 5 percent of teens believe credit card debt is no problem.

"Teens are getting the message that credit has a down side," says Parfrey. "But since debt is inevitable, we emphasize the idea of creditworthiness: good debt versus bad debt. After all, it's important to have an established credit record and credit scores. When you buy a house, it's not as if you can just put down cash on the barrelhead."

Which plastic is right for my teen?
Type of cardProsCons
Debit cardUses money in checking or savings account. Easy to set up.Risk of overdrafting account and incurring fees. Does not build credit history.
Prepaid or stored-value cardSpending limited to amount loaded on card. Online checking of balances and spending. Authorized adults can load funds. Employers can load wages onto some cards. Major credit card branded cards can be used many places.Fees are charged for activation, loading money, monthly maintenance, many more actions. Does not build credit history.
Joint credit cardBuilds credit history.Parent and teen responsible for debt.
Secured cardCredit limit set by savings account balance. Builds credit history.May have high APR.
Authorized userEasy to set up.Teen can piggyback on parent's credit history. Parent solely responsible for debt. Potentially puts parent's credit score at risk.

Caren Weiner Campbell freelances from New York City.

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