Not All Plastic Builds Credit History

By Dawn Handschuh, Personal Finance Writer Archive

 Getting a credit card is practically a rite of passage for many teens, along with weekend curfews, dating, and driving. But not all plastic is alike.

If you want to teach your children prudent money management and responsible financial habits, credit cards can be a great tool to introduce them to the world of credit. Credit cards are a ubiquitous part of American life, so why not introduce your kids to them while they're still at home and under your watchful eye?

Beyond being a good teaching tool for parents, credit cards should primarily be considered as a convenience or an emergency fallback for your children, not a vehicle for enriching their lifestyle. But not all plastic makes good credit history building blocks because they don't all report bill-paying activity to the credit bureaus. Here are two that don't build credit history.

Debit cards

Debit cards can be used in place of cash or checks when paying for goods or services. Money is automatically withdrawn from your checking account at the time of transaction.

Many parents like debit cards because they limit spending to the amount in the checking account. If your teen overspends, though, he may incur overdraft fees.

Prepaid cards

Unlike debit cards, prepaid cards aren't linked to a bank account, so there's no likelihood of your child overspending. Parents activate the card by loading it with a fixed dollar amount. Other authorized adults, usually family members, can add money on birthdays or holidays if they wish. You can track expenditures online.

The disadvantage with prepaid cards is that a fee is charged for nearly every action, including initial enrollment, balance inquiries, reloading or replacing the card — even inactivity fees.

If you prefer giving your child a credit-building card, shop for secured cards, joint credit cards, student credit cards, or "no credit" credit cards. Each option has its pros and cons. Regardless of what card you ultimately choose for your child, make sure to:

• Set clear spending limits if they aren't already dictated by the card.
• Discuss what types of purchases are appropriately charged.
• Spell out who's responsible for payments.