Creditors prey on young borrowers. Teens are typically not responsible when they receive their first credit cards if they are not instructed about the dangers of credit. For that reason, it is the responsibility of parents to teach their teenagers about credit cards and how to best use them.
Consider Prepaid Debit Cards
One way to teach your teen how to use a credit card responsibly is to give him a prepaid teen debit card. These teen debit cards have a preset limit, such as $200, that is set by the parent. In fact, they are not credit cards at all, but work rather like a gift card that can be used anywhere that a credit card is accepted. They have major credit card logos. The benefit of these teen debit card programs is the fact that they limit the amount the teen can spend, while at the same time introducing them to the use of credit cards. Teens will not be able to rack up thousands of dollars of credit card debt, while at the same time they will be able to make purchases where a credit card is necessary.
The best prepaid teen debit card is one that you can refill from time to time. You could use these cards as a way to give your child his allowance. Rather than giving him cash, you can give him a debit card to use. Again, this limits how much your child can spend, while at the same time teaching him how to use a credit card.
Monitor Your Child’s Spending
No matter how you choose to start your child, whether with a teen debit card or a real credit card, put a low limit on it. Also, always monitor your child’s spending. Discuss all spending choices that your child made with him, helping him see which were wise and which were foolish choices. The best prepaid teen debit card will give you the chance to see the child’s spending habits on a monthly report. Look for teen debit card programs that give you this option.
Teach Teens About Interest Rates
Young spenders often do not understand how interest rates work. While they know that credit cards have an interest rate on them, they do not understand how these interest rates affect them. Show them how this works as you work with the teen debit card. When your child uses the entire balance on the card, sit him down and talk to him about how much that money would have actually cost if the card had an interest rate associated with it. Sometimes just by showing a teen how expensive credit card debt can be, you can encourage them to shop within their budget.
Co-Sign with Your Teen
When you feel that your teen is responsible enough to start using a real credit card, then consider co-signing with your teen on a card. It is important for young spenders to build a solid credit history, and sometimes this is impossible without a credit card. If you co-sign with your teen, you will be able to view statements and monitor your child’s spending. Keep in mind, though, that you will be responsible for any payments your child does not make. Make sure that you are confident in your child’s responsibility level. This, again, will give you the chance to talk to your child about his spending habits, teaching him how to properly use money. Encourage the teen to pay off the balance in full each month to avoid interest fees.
Avoid Baling out Your Teen
If your teen makes some poor financial decisions after getting his first credit card, you may be tempted to bail him out. While this will make you feel better as a parent, you will be missing the chance to teach your teen a valuable financial lesson. If you pay off his $2,000 balance, he may think someone will bail him out of a $20,000 debt later in life! Instead, help your teen create a plan to pay off the debt. Perhaps allow him to do some extra help around the house to earn some money to pay it off. Be sure that you talk to him about the amount of money he will spend on interest by the time he pays off the debt. You can always take the credit card away until the debt is paid off to keep him from spending more.
Teaching your teen about credit is important. Without a good, solid credit history, your teen will find it difficult to get a car or a home in the future. Without active teaching from parents, teens will usually make poor spending decisions when they get their first credit cards. Consider starting with a teen debit card, and then moving to a credit card with a low limit. Monitor your child’s spending and give them instruction along the way.
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