Paying with Plastic
As a financial writer and lecturer in area schools, Maureen Dolan Rosen of Chapel Hill has a firm, simple answer when asked about getting credit cards for high school students: Don’t do it.
“Credit cards are a dangerous, slippery slope for today’s teenagers,” she says. “Most teens don’t even understand how credit cards work, and they can be in over their heads before they know it.”
Today, younger and younger teens are receiving credit card solicitations, addressed to their parents, while they are still living at home. And even more can be seen pulling out the plastic to pay for clothes, pizza or gasoline throughout the Triangle. According to Jump$tart Coalition, a national advocate for financial literacy, one in every three high school seniors uses credit cards.
Although proper management of a credit card can help establish a good early credit rating, financial experts agree that only mature teens with a solid education on the pros and cons of credit cards can make it all work.
The burden of proper credit card education falls on parents, who have to sign to authorize a credit card for teens younger than 18 years old. All too often, parents are not setting a good example with their own credit card habits, leading to problems for everyone.
Rebekah O’Connell, a certified consumer credit counselor with the Raleigh-based Triangle Family Services of North Carolina, has seen too many parents get their teens credit cards, not establish any limits or ground rules and then bail their teens out of debt.
“If parents are going to get their children a credit card, they need to spell out the rules and stick to them,” she says. “Often kids start carrying a credit card to just use in an emergency. Soon, you seen them going into debt every time they order a pizza at the mall.”
A typical mistake parents make is expecting children to make the leap from a childhood savings account to managing a credit card, says Laura Levine, Jump$tart’s executive director.
“They need to know how credit works: What do you do when the bill comes? Why is it important to pay on time? How do interest rates work?” she says.
Having a credit card in high school can be beneficial if the teen is responsible and if he or she is given a credit card with a low credit limit. Parents also should monitor the teen’s spending and payments monthly. It is important for parents to discuss the spending choices made, the implications of those choices and the obvious and hidden costs of credit cards with the teen.
Before teens acquire a credit card, they should have their own checking account and know how to write checks, keep their check register up to date and balance their checkbook every month, says O’Connell.
“If teens get a credit card, they only need one with a low limit,” she says. “I saw a teen recently who had 17 different credit cards for almost every store at the mall and a balance on nine of the cards.”
Teens should keep a record of the credit card purchases they’ve made during the month, with a running total. When they’ve reached the amount they can afford to pay off at the end of the month, they should stop using the card until the next month.
“If teens are using credit cards, they need to get in the habit of paying off the balance each month,” says Rosen, who teaches local workshops to children on the merits of budgeting and saving money. “They also need to understand with the high interest rates on credit cards exactly how long it takes to pay off a credit card and the extra money it costs them.”
Parents and teens should talk about what types of purchases are appropriate with a credit card, O’Connell says. Triangle Family Services of North Carolina offers special programs for teens and parents on the use of credit cards.
Local financial experts also caution parents on the pitfalls of bailing their teens out when they get in over their head with credit cards.
“These parents are not doing their kids any favors in the long run,” says Rosen. “It’s better to be involved enough with your teen’s credit use to be able to nip potential problems in the bud rather than give your teens the message that they can use credit irresponsibly and not pay the consequences.”
Credit cards should be viewed as a convenience and not an extension of income. The goal is for teens to learn to use credit cards as a tool, not a crutch.
“Teens who are not educated about credit cards can cause long term damage as far as getting an apartment, car or even job years down the road,” says O’Connell.
Sidebar: What About Prepaid Credit Cards?
Prepaid credit cards also are a good alternative to regular credit cards for teens and can serve as a type of training wheels to ease young people into using credit cards. Visa Buxx is one such card, which allows parents to limit spending by funding the credit card via transfers from their checking account to the card. They can monitor their teen’s spending on the card with monthly statements or online.
The best way to fund a prepaid card is with the teen’s own money. When choosing a prepaid card, watch out for fees, O’Connell says. Low-limit credit cards are another alternative. Parents co-sign with their teen on these cards and set a low credit limit of $200 to $300.