You've watched as your child took his or her first steps, endured the first haircut and learned to ride a bike. Now your little one has grown into a teenager and you've decided he or she is ready to take on the personal financial responsibility of that first credit card. What's the best student credit card offer for your teen, and how do you introduce him or her to the concept of credit?
It's not as difficult as it may seem, say three financial experts. It's mostly a matter of knowing your teen - and who knows a child better than Mom and Dad?
According to Amber Stubbs, managing editor of CardRatings.com, you have two good choices when it comes to the first credit card for your teen: Help your teen sign up for a prepaid card, or make him or her an authorized user on your own credit card.
A prepaid card for your teen
How it works
With a prepaid card, you deposit typically between $300 and $500 in the account, just as you would if you opened a checking account. Once the money is deposited, your teen can use the prepaid card like a credit card, drawing down the account balance and demonstrating basic financial responsibility paying it back on an agreed schedule.
Stubbs believes the prepaid card is the best choice for most teens, especially if the idea of plastic is new to them. "It's a great way for them to learn how to manage money," she says.
Young people often have a problem making the connection between plastic and cash. "This is a good way for them to learn that this is real money," Stubbs says. Once they show can handle the prepaid card, they can graduate to a credit card of their own.
Another advantage to the prepaid card is that the child can't go into debt, says Ric Edelman, who's been ranked among America's top 100 financial advisers by Barron's. "If you put $300 on a prepaid card, the credit limit on that card is $300, and the child can't spend more than that," he explains.
A prepaid card won't help your teen build credit history. The card builds credit history with you, not with the card issuer. (On the other hand, if your teen totally drops the ball, drains the account and never makes a payment, there's no outside-world consequence. You'll need to decide if you want that safety net.)
Another downside of prepaid cards is that many come with fees. The fees can vary and typically range from $5 to $10 for set-up and other reasons.
That's why Stubbs recommends shopping around for the best prepaid cards.
"If you shop around," she says, "you can find ones that have reasonable fees. Hopefully, you only have to pay the fees for long enough for your kid to understand how the card works." Once your child gets wise as to how credit cards work, he or she can move on to student credit cards.
Among the prepaid cards Stubbs recommends because of their low fees are:
Bluebird by American Express (American Express is a CardRatings.com advertiser)
- Chase Liquid
The Green Dot Visa or MasterCard
Making your teen an authorized user on your credit card
How it works
Call your credit card issuer, ask them to add your teen as an additional authorized user, and request an additional card with your child's name on it. Your child is free to use the card wherever it is accepted.
Web personal finance columnist Liz Pulliam Weston believes that in most cases, it's better to add your teen to one of your existing cards as an authorized user than go the prepaid route or co-sign for a new account.
Her reasoning: "You have more control when you add an authorized user. It's easier for you to 'shut off the tap' and remove or suspend your teen if he or she messes up than it is to close a joint account."
Also, she says, opening or closing a joint account can have an implication for your own credit score, when what you really want to do is help your teen build his or her own credit score. "Adding an authorized user typically doesn't (affect your credit score), and it can help your teen build his or her own credit."
Your card will most likely have a higher credit limit than a credit newbite could get. If you add your teen as an authorized user, you, not the card issuer, should monitor your teen's spending.
If you are going to add your teen to your account, Weston says, you must be very clear about the rules for using it. She says, "Tell your teens what their spending limits are and what consequences they face for going over that limit." Also, be sure to discuss who's paying the teen's portion of the monthly bill and how.
Parents who want to add their teen as an authorized user to a new or existing account should select a card with a relatively low credit limit. Your goal is to help your teen learn how to handle credit responsibly and the importance of never carrying a balance.
If you use a rewards card, your teen's purchases will generate rewards in the main account, which you may choose to share with your teen (or not!). If you do, you have another opportunity to show how carrying a balance quickly wipes out any rewards benefits, even on a low-APR card.Bottom line: Pay on time
It's crucial that you teach your teen to pay his bills in full and on time - whatever you decide is the best credit card to have. "Never let your teen get in the habit of carrying a balance," Weston says.
Edelman says whether they get their own card or you add them to one of your credit cards, it's critical your child demonstrate a history of repayment.
"As long as they're making payments on time and never bouncing a check, both options will help them build a credit history," he says. A solid credit history and a good basic understanding of personal finance will help your teen get off to a great start when it's time to leave the nest.