There are a lot of firsts when it comes to raising a teen - first date, first time behind the wheel … first credit card?
"Credit cards get a bad rep, but that's often because (adults) don't use them responsibly," says Paul Golden of the National Endowment for Financial Education. "They're actually a great financial-planning and money management tool when used correctly."
Giving teens plastic can offer several advantages, from eliminating the need to carry cash (easily lost or stolen without any chance of recovery) and providing a way to pay for emergencies to helping young people build credit scores (get your free credit score at WisePiggy.com).
Parents have a wide range of options when it comes to trusting their teens with money.
Savings and checking accounts
Teens who stick to traditional checking or savings accounts can't spend more than they have (one of the risks that comes with access to a credit card). The threat of incurring fees if the balance dips below zero should help your teen keep his or her spending in check.
Most banks issue debit cards for these accounts that teens can use for both emergencies and everyday expenses, while parents can usually monitor spending and deposit extra cash if necessary.
Prepaid and reloadable cards
Some financial institutions even have special prepaid cards intended for those who are ready to test the waters of financial independence without applying for a credit card or carrying too much cash. For instance, the Visa Buxx card is available to children as young as 13, can be reloaded, and won't allow the cardholder to overspend (and amass overdraft fees) - transactions are denied if there aren't enough funds in the account.
The only major drawback is that debit and prepaid cards won't help your child develop a credit history.
Adding an authorized user
Parents can usually get an extra card for their kids from their credit card issuer by adding them as authorized users on their account.
You can track your youngster's spending habits by logging into your account or reviewing your monthly bill, while teens will typically build up good credit as long as balances get paid on time. Be sure to check with your bank to make sure they'll report payments to credit bureaus using both your and your child's names.
You'll want to set some serious ground rules if going this route, as you can't always put credit limits on an authorized user's card other what you yourself face -- creating the risk that Junior will go on a spending spree your dime.
Age 18 and beyond
Once your teen turns 18, a couple more options come into play, as 18 is the minimum age someone must be to apply for their own credit card.
Unless a younger applicant can provide proof of independent income and show that he or she is able to make the minimum payment on the card, the applicant will need a co-signer over the age of 21 for the account.
Secured credit cards
Secured credit cards typically require putting a deposit of $500 or $1,000 into a related savings account and only charging amounts equal to what's in the account.
Accounts don't require a prior credit history, as banks will just take your savings if you fail to pay your bill. That makes secured cards great for young adults who need to build good credit but avoid the temptation to overspend.
However, check with the issuer to make sure payment history will be reported to all three major credit bureaus - TransUnion, Equifax and Experian - because most, but not all, lenders do. Also be aware that some secured cards charge interest and other fees.
Student credit cards
Your son or daughter can start building their credit score with proper use of a student credit card. Keep in mind that there's a good chance you'll be responsible for any unpaid balances (and your credit will be affected as well as your child's) if you co-sign (something you'll have to do if your child is under 21 and lacks independent income).
What to do
Gail Cunningham of the National Foundation for Credit Counseling recommends slowly building up your child's access to money long before they're eligible to purchase with plastic. Start with a checking or savings account and incorporate a debit card if things go well, followed by authorized use of a parent's credit card. If student your son or daughter keeps acting responsibly, you can eventually help them get their own plastic so they can start learning for themselves how to build good credit with proper use of the best credit cards.