teen credit

Giving your teen a credit card might seem a bit risky. But, if managed correctly, it can teach valuable financial lessons on budgeting and disciplined spending that he or she will carry into adulthood.

It also can pay dividends for parents if managed correctly, said Vince Hruska, senior vice president of product strategies for City National Bank. Some of those benefits include:

  • The convenience of not having to keep cash on hand.
  • The ability to monitor your child’s purchases.
  • Greater purchase protection against theft and damage.
  • Increased points and rewards from your teen’s spending.

“With the proper limits in place, granting some access to credit can be a win for parents and their kids,” Hruska said. “With parental oversight over spending, and reviewing with a child early spending and savings choices, there is a great opportunity to impart a financial education that can last a lifetime.”

First Steps

Before you hand your teen a card, here are a few tips to increase the benefits and limit the risks:

Consider the card you will provide. If you start with a prepaid card your teen will have a specific spending limit built into the card.   When the funds on the prepaid card are depleted, you can provide your teen with a new card.

You can also consider obtaining a credit card account for yourself and add your teen as an authorized user.  If the credit card comes with family card functionality, like those offered by City National, as the primary account holder you can establish a preset spending limit for the teen’s card and monitor transaction activity.  Having hard dollar limits in place, makes it easier for you to teach some basic lessons about spending discipline, including the importance of prioritizing spending and the value of deferred gratification.

Give your teen a monthly budget. A budget that falls below the card’s spending limit will help him or her learn to track and prioritize spending. Encourage your teen to give some thought to what he or she will spend money on before he or she uses the card. And let your teen know where it is permissible for him or her to use the card.

Emphasize responsibility. Make sure your teen understands the importance of physically safeguarding the card and not sharing the card number with others.

Explain the consequences of overspending. Make sure your teen understands what will happen if he or she exceeds the limits on a credit card, including, but not limited to, the embarrassment of having a card transaction declined in public. 

Guide your teen through the next steps of managing credit. Once your teen has learned to spend within limits, introduce him or her to what will be needed to qualify for credit at age 18 or older, as well as the risks of managing credit. This discussion should cover the need to have income and assets to qualify for and repay the credit (or a co-signer may be needed), the effect of compound interest, the importance of credit scores and how not paying on time can negatively affect a credit report and limit the ability to borrow in the future. If your teen is at least 18 years of age and cannot qualify, you could apply for a joint credit card account to help him or her establish credit.