Teenagers and Credit Cards

Dear Working Mom,

This month I helped my college sophomore niece pick out a credit card. We spent a decent amount of time looking at cards, and even more time talking about the basics of how she should use it.

Here’s an overview of everything we talked about. I figured I would share it while it’s fresh in my mind, in case you’re also thinking of showing one of your kids the ropes, or another young person in your life!

The Reason Why:

• A good credit score can make so many things in life easier.
• To have a good credit score, you need to have credit— the earlier, the better.
• If a young adult is responsible with money, then a credit card from a young age will help them build excellent credit.

Define “Responsible”

If you’re not certain if they will handle it responsibly, clarify this first. This is a topic unto itself, so check out this separate article if you’re still mulling over this.

The Summary:

1. We talked about why she wanted a card, and decided on which long-term and short-term benefits mattered most to her.

2. We talked about ground rules for using a card responsibly and to build good credit.

3. We compared cards using NerdWallet’s comparison tool.

4. She applied for a card.

5. We reviewed the things she should do once weekly with her card.

6. We talked about the things she should do once annually with credit reports, or anytime she gets a “red flag” feeling that she should double-check her credit report for any signs of identity theft.

The Details:

1. Talk. Talk about the long-term and short-term benefits of a credit card. Here’s why my niece wanted a card:
   • Long-term and most important goal: build good credit. This will make it easier for my niece to one day buy a home, or a car, or even start her own business and secure funding.
   • Short-term and less important goal: have an alternate payment method on a trip, in case her planned payment methods don’t work. She hopes to study abroad, if/when COVID allows.
2. Lay out ground rules:
   • Use no more than 30% of the card’s available credit at any time. For example, if their card has a limit of $1000, then no more than $300 should be on the card at any given time. Note, some financially-minded die-hards will say this should be more like 5-15%, which means no more than $50 or $150. That is fine too! Up to you. I just wouldn’t go higher than 30%.
   • Use the card at least once a month for a small amount, that they are certain they can pay off.
   • Pay off the balance of the card:
     • On time or before.
     • In full— no debt should carry over, even a single month.
     • Each and every month.
   • They need to stay in touch with you about it. They should feel comfortable asking you anytime they are uncertain about a purchase decision, or any aspect of using their credit card. Especially if they are “in trouble” and put more on it than they can pay off, they need to be able to come to you for advice and help getting back on track.
3. Compare cards.
   • Look for a card that has no annual fee.
   • For this, I chose to use NerdWallet’s comparsion tool.
   • Do be aware that NerdWallet has advertising partners, so you’re not getting a completely exhaustive comparison tool. They only have some cards in it, for example, or they have more articles and stats about cards they partner with. That being said, I’ve found that most credit card-centered review and comparison sites have this, and NerdWallet presents quality information in a fair format. So I think they’re okay to use as a starting point.
4. Apply for a card. This was the fastest step. Since the card we picked for her is a student card with a low limit, it didn’t require a credit history. She was approved so fast it was scary… less than an hour. Yikes!
5. Review what they should do at least weekly. They should log into the card’s app or website to:
   • Recall what the total line of credit is. Look it up if not sure, and if the app isn’t clear, then call the company.
   • Read all recent transactions… they should all look familiar
   • Look at the current balance… is it over 30% of the balance? If so, pay it all off immediately to get the balance below 30% of available credit.
   • Check when the next bill due date is. They can pay before the bill is due, or at least 3 business days before it’s due. Paying early lets them check that payment was received on time.
6. Review what they should do annually with their credit report:
   • Review their credit report. Not the score, but the full report. During COVID, we can pull them weekly for free. Read each report (3 total) and check to make sure all the accounts listed are truly yours.
     • https://www.usa.gov/credit-reports has background info about this
     • https://www.annualcreditreport.com/requestReport/landingPage.action helps you to pull all three bureau’s reports
   • In addition to once a year, also do this anytime a “red flag” appears and they suspect that someone else might have tried to use their credit card (or name to apply for another card)

The Encouragement for Them:

Don’t be too put off or discouraged if it feels super intimidating or boring to check all this stuff.

Keep in mind it’s still new to you, and checking your credit report annually is part of adult money management and can save you YEARS of financial trouble. It’s a good habit like dentist 2x annually. Boring… but your future self deserves great teeth and great credit!!!

You’ll get into these good habits soon enough if you keep at them, and it won’t feel so overwhelming as it did for me the first few times. Being able to quickly check your current balance, as well as knowing your credit limit, and pulling and reviewing your credit report once a year, are all key skills that you’ll build in no time. Even if you don’t feel comfy just yet, you’ll get there.

The Encouragement for You:

Whether a credit card is a good choice for your young adult or not, props to you for looking ahead. Teaching a young person “why and how to use a credit card” is one of many ways to position a young person in your life for a solid financial future.

I hope this list of ideas helped you, Dear Working Mom!

All my best,

Wendy