Teens and Credit Cards

Teens and Credit Cards...are they compatible? The best strategies for teen credit cards.

Even my three-year-old has some understanding of what a credit card is: You give it to the guy at the front of the store, he swishes it through a black box, and you can buy whatever you want with it. Right?

Truly, what is a credit card? That little piece of shiny plastic may appear harmless but, watch out, it may sting you!

A credit card represents an an extension of credit issued to the card holder. The card holder promises to pay for the goods or services purchased with the card along with any interest or other terms agreed to when the card was issued.

In an interview on Oprah Radio, Seventeen magazine's Ann Shoket revealed that credit card debt is a big problem for many of the magazine's young female readers.

Teen credit card debt statistics given by JumpStart Coalition for Personal Financial Literacy show that one out of three high school seniors use credit cards and one-half of these students have credit cards in their own names.

Teen Prepaid Credit Cards or Teen Debit Cards

What about teen prepaid credit cards? Technically speaking the terms "prepaid" and "credit" conflict each other. If it is prepaid it is actually a debit card.

Teen debit cards are prepaid, meaning that the card holder (or the card holder's parents) "load" up the card with a sum of money. The card holder's spending is limited by the prepaid amount. Click here to see teen budget ideas.

Teen Credit Card Basics

For good teen finance you should know these basic credit card facts:

• A credit limit is how much money the card company is willing to issue to the card holder. The amount is based on the card holder's ability to pay the debt back.
• Minimum monthly payment is the amount the credit card company requires that card holder pay back on a monthly basis. Paying only the minimum required payment is a bad idea because the card holder will be paying 2, 3, or more times as much money back in interest.
• Interest rate is price the card holder pays the credit card company to be able to borrow the money. Credit card interest rates are typically very high...24% is common.
• Late fees are added on to what the card holder has to pay the card company if payments are late. Late fees depend on the credit card company, but can be as high as $35.
• Grace period is the period of time after a charge is made until it can be paid back without finance charges. Typical grace periods are 25 days.

Teens and Credit Cards Compatibility

Should teens be allowed to have credit cards? The alluring convenience of credit cards is a double-edged sword that can quickly get teens into money trouble.

Using a credit card to build credit can be a good thing, but watch out! A lot of working teens are already in trouble in their young adolescent lives with credit card debt.

Teens and credit cards is a topic that should be discussed between parents and teens to help ensure good teen money management.

Proceed with ultimate caution with teens and credit cards. As a minimum for a teen to have a credit card, I suggest a gradual well-planned approach:

• The teen must be responsible and show good teenagers money management.
• Make sure your teen has demonstrated the ability to handle a checking account.
• Only allow a very low credit limit.
• Make sure the teens earn money.
• Never pay interest. Paying interest on a credit card is a bad idea. Make it a requirement to pay off the credit card balance every month before finance charges kick in.
• Parent involvement is a must. Monitor your teen spending and limits. Parents should make suggestions for changes when appropriate.
• No bailouts allowed. If your teen gets into trouble with the credit card, no parental bailouts allowed. Giving your teen a bailout will only reinforce the wrong message. It is better for the teen to learn the message now when the stakes are not as high than years down the road when something much bigger is at stake.

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