During the late teen years, it seems as if there's a new rite of passage every day. Among the scariest for many parents is picturing their carefree teen with a credit card. How do you know your teen is ready for the responsibilities that come with handling that shiny new piece of plastic?
The good news is teens today are more debt conscious than ever, partly thanks to the Credit CARD Act of 2009, which made it more difficult for young adults to get credit cards until they are 21. According to a May 2012 Sallie Mae survey, just 35 percent of students owned a credit card, and one-third of them carried a zero balance,
For credit card applicants younger than 21, the CARD Act requires proof of income in order to qualify for an account in their names. Otherwise, they can be added as authorized users on a parents' cards, or have Mom or Dad co-sign or open jointly owned card accounts. But then parents (and their credit scores) are on the hook for any financial shenanigans committed by the teens.
The fact is, even young people with good credit card intentions can get into debt trouble.
That was the case for Deanna Southerling. When she was 18, she left her home state of Kentucky to head to New York's Syracuse University for her first year of college. Anticipating some trips back and forth during school breaks, she thought she was doing a wise thing by applying for a credit card from an airline, so she could earn miles and save money on flights.
When she applied, she had 0% interest for 18 months. To her surprise, because she had a good track record with her first credit card (and it was pre-CARD Act), she was given a $5,000 credit limit. "I was a little wary about having so much money at my disposal, but was sure I would be responsible with it," she says.
Four years of college later, Southerling says she did buy a lot of plane tickets, with a few shopping sprees thrown in. The good news is that she earned at least two free flights back home. The not-so-good news? She maxed out the card, which along the way increased her credit limit to $9,000.
To help your teen avoid graduating into debt, here are some signs that he or she is not ready for a credit card, along with plastic preparation tips.
1.The sign: They're asking you for $20 at every turn.
In other words ... If they can't budget now, how will they handle monthly bills?
"We've removed the physical connection to money in our generation," says Kimberly Foss, a certified financial planner and founder of Sacramento, Calif.-based Empyrion Wealth Management. The problem is, paying with plastic often feels like it has no real-money ramifications. That's why before her own teens even considered applying for credit cards, Foss had them practice money management old-school style.
"Open up a checking account, write checks the old-fashioned way and keep a hand-written registry," she says. "There's a direct psychological connection [between] writing things down and understanding where your money goes." Even better is if they get into the habit of physically putting a set amount of their income or allowance into designated jars -- a percentage goes into savings, some is set aside as spending money, etc.
Of course, since teens live in a technological world, Foss adds that budgeting apps such as Mint.com can be great teaching tools as well. Teens who learn to plan for expenses and pace themselves so they're not short on cash before the month is out, are more likely to manage on-time payments once credit cards come into play, she says.
2. The sign: They try to keep up with the Kardashians (on a Honey Boo-Boo budget).
In other words ... Will they spend beyond their means once they have credit at their disposal?
Your teen probably wants to fit in, and sometimes they think owning designer sneakers or the latest gadgets can give them "street cred." It's up to you to teach them the financial facts of life, says Neale Godfrey, family financial expert, author and creator of the Green$treets: Unleash the Loot! App, which educates kids about money. "Show them some of your bills, what it costs for mortgage or rent, the utility bills, what it costs to pay for a tank of gas," she explains.
Getting a sneak peek at what their expenses may entail once they leave your nest (including impending student loans) can help teens understand why it's important to avoid additional debt that can result from irresponsible credit card use. Godfrey says starting out with a debit card is a safe way to let them assert some financial independence. "That's the product they should go away to college with. Then you have the ability to see how they're spending their money," she says.
3. The sign: They think APR is a new texting acronym.
In other words ... Do they really get what credit is all about?
First off, take the time to go over how compounding interest works -- more specifically, how it works against you when you do not pay off your balance in full, says Godfrey. "You also want to make sure they understand what a credit score is, how they will be tracked by the rating services, and that their score is going to follow them for a very long time," she says.
Hammer home the point that there are real-world consequences for a few missed payments, says Scott Gamm, author of "More Money Please: The Financial Secrets You Never Learned in School." "Not being able to get a car loan is one. Some employers are even checking credit reports of applicants," he says. Once you point out how uncool they'll be if they have to bum rides with their friends -- or, heaven forbid, take the bus! -- because they can't get approved for an auto loan, they'll get it.
4. The sign: They are a little too used to getting what they want.
In other words ... Will they have the willpower to delay gratification when purchases are just a swipe away?
This one's your fault, parents, says Foss. "We want to give our children the best, but we create a monster as well," she says. In many families today, there is no such thing as saving up allowance money for a whole summer to get that shiny bicycle.
Gamm advises having a heart-to-heart discussion with your teen to find out the real motivations behind wanting a card. If it's anything resembling "because all of my friends have one" or "in case I want to buy something cool and pay it off," then consider that your red flag. "Credit cards are simply a tool to build good credit, not a way to extinguish good spending habits," he says.
That being said, when your teen does begin using credit, encourage him or her to stick with a self-imposed $50 per month spending limit. That's a reasonable balance to pay off in full each month.
As for Southerling, seven years after opening that airline credit card, she's about halfway toward her goal of paying off the balance completely. "I wish I didn't have to shell out so much money to credit card companies every month and could more thoroughly enjoy the money I work hard to make," she says. "But I realize that I'm one of the lucky ones who did graduate and got a job that pays me enough to be able to pay off the financial mistakes of my college days."