When's the Right Time to Give Your Child Her First Credit Card?

by Dawn Handschuh, Personal Finance Writer   

Teens encounter several rites of passage as they grow up — learning to drive, registering to vote and becoming eligible for the draft. For many American teens, getting their first credit card is also symbolic of growing independence.

Though many teenagers get their first credit card while still in high school or in college, some parents may be understandably reluctant to give their child the means to run up debt, particularly if their own experience with managing debt has been problematic.

Enabling your child to accumulate burdensome credit card debt when they'll already likely be saddled with considerable student loan debt is no small matter. And college debts that persist after students leave campus can be a special hardship for those who fail to earn a degree — or, presumably, the higher income that goes along with that degree.

One 2002 study showed that only 63% of students enrolled in four-year colleges ended up graduating. (Some college experts believe that more students drop out of college due to financial pressures than poor grades.) Of those who do graduate, 60% leave school with debt; in 2006-2007, the average graduate owed $22,700.

If your teen is headed for college, her senior year of high school might be a good time to have her apply for a credit card. Most college students already use credit cards; according to a 2006 study of Louisiana State University students, nearly 71% of students had at least one credit card. Why not teach your child how to use one responsibly before she leaves home?

Provide instructions with the credit card

Giving your child a credit card while she's still living at home allows you to monitor her repayments and make sure that things don't get out of hand while you still have influence. You can also prevent any small mistakes she might make from mushrooming into larger ones. Certainly, you would never give your child a card without fully informing her about what they're taking on. Sit down and discuss with her how credit cards work, making sure to touch on these specific points:

• The consequences of late payments
• How late payments and compounding interest can quickly add more debt
• Distinguishing between wants and needs
• Agreeing what credit cards should be used for (For many teens, the difference between using cash and a credit card can be too abstract to fully comprehend; don't let your children think that a credit card is a free pass to spend. Be sure they understand there are future consequences to their actions.)
• The importance of paying off the balance — not the minimum payment — in full and on time each month
• Dispelling any false notion that credit cards represent "free money"
• Helping her recognize and avoid impulse purchases
• Understanding what credit reports and credit scores are, how they're shaped by credit card payments, and how your child's current credit behavior affects the cost of future borrowing

Credit card marketing restricted on college campuses

Credit card reforms that were passed in May 2009 include provisions that address aggressive marketing tactics used by credit card issuers on college campuses. Under the new law, which becomes effective in February 2010, students younger than 21 won't be able to sign up for a credit card unless their parents co-sign or unless the student can prove his or her own ability to pay. Students are also limited to borrowing up to $500 or 20% of their annual income at a time, whichever is greater. In addition, lenders will have to get the co-signer's permission before they raise credit limits.

The new law should go far in restricting students' ability to get into credit card debt over their heads, but it won't eliminate the need for parents to discuss the fine points of credit card accounts with their children.

Alternative cards for prodigious spenders

If you're concerned that your child lacks the discipline and self-restraint needed to manage a credit card, you have several alternatives to conventional credit cards.

Start your teen off with a debit card that's linked to his or her checking account. You may decide to deposit a fixed amount of money in the account each month for normal living expenses, like food or textbooks. If your child earns money from a part-time job while in school, that money could be deposited in the account. Learning to use a debit card can still teach your child responsible money-management habits, but watch out for overdraft fees triggered by overspending.

Other options may include opening a joint credit card account with your child, adding your teen as an authorized user, or purchasing a pre-paid credit card with a low spending limit. (Certain cards allow parents to monitor their kids' spending patterns.) You might also consider starting your child off with a gas credit card, which limits what he or she can do with the card. Some say that opening a joint credit card account with your child isn't really teaching her how to manage her own money, because chances are pretty good that you'll bail her out if she overspends.

Encourage your child to research card options with you to find the best one, and make sure she learns how to read the fine print concerning exclusions, exceptions and hidden fees.

Credit cards can serve as an important teaching tool for teens when parents are actively involved in discussing their use and potential abuse. Teaching your child good credit habits early, with helpful guidance and supervision, can stand them in good stead for many years to come.