Teenagers and Credit Cards: Define “Responsible”

Dear Working Mom,

Are you considering helping your older teenager get their first credit card, or maybe a niece or nephew? Earlier this month, I helped my niece apply for hers. We talked about it before actually getting the card, and I checked in with her parents too. We all agreed she is ready for her card and will handle it responsibly.

But how did we get to that point, Dear Working Mom? It’s not an easy judgement call, to decide if a teen is ready to handle a credit card responsibly. On one hand, it’s such a gift to a young person if you can help them get a head start on an excellent credit score. But on the other hand, if it’s mishandled, a credit card could set them up with a financial burden and debt that they’re not ready for at their age.

And so, I’m writing you this letter in case you come to a similar decision crossroads, and it helps you to read through how I approached it.

How I Defined “Responsible”

I moved through the decision in a pretty linear way. I thought of the basics, that are more about previous cues of readiness in the teen.

I asked myself if my niece had:

• earned money for herself in one way or another – whether through a part-time job, a short summer gig, babysitting, or even chores around the house?
  • A “Yes” indicates credit-card readiness.
• shown interest in saving part of her earned money for some valuable future thing (an upcoming trip, books for school, a large purchase like a used car, etc). This can certainly be a fun future thing– I’m not asking for her to be a financial saint that’s putting every penny towards college tuition or a Roth IRA– the thing I’m looking for is the ability to proactively put money aside in order to hit some future financial goal. This kind of ability to delay material gratification is important.
  • A “Yes” indicates credit-card readiness.
• shown any red flags, like:
  • a habit of spending any money or gift cards immediately, on items that are impulse buys and not used more than a few times before forgotten?
  • losing cash?
  • regularly misplacing their ID card/keys/wallet?
  • asking for big purchases or many purchases, but not being willing to sit through conversations about the pros and cons, and/or not being willing to pick up extra chores or a small job to help their case?
  • any other gut feeling from you, that the teen isn’t quite ready?
  • A “Yes” to one or more of these “red flags” might indicate it’s a good idea to start talking about why a credit card is desirable, but to wait a few months and re-assess later, instead of helping them get a card soon.

The Pros and Cons We Discussed

Pros:

• A good credit score makes it easier for them later in life to:
  • buy a house
  • get a lower mortgage rate on a house purchase
  • get good rates on other loans and financial products
  • get small business startup funding
• To have a good credit score, you need to have credit— the earlier, the better.
• If they’re responsible with money, then a credit card from a young age will help them build excellent credit.

Cons:

• Credit card debt is EXTREMELY EXPENSIVE
• Credit card debt is probably the worst kind of debt to have
• Credit card debit is very hard to get rid of
• Credit card statements take practice to read correctly– the minimum payment is NOT the amount to pay, you need to pay the full amount each month by the due date or ASAP.
• The full balance is not an okay amount to put on the card. They can only use 15 or 30% of the card’s maximum limit. They cannot use the full balance. Repeat that to the teen, for effect, please!!!
• Mishandling a credit card can follow them for YEARS and YEARS. More years than they’ve yet been alive. Well into their forties and beyond, if they accumulate debt at any point.
• Mishandling a credit card can make it harder for them to one day buy a house, or save for retirement, or get married, or have kids of their own, or take big vacations, or do a lot of fun things.

The Ground Rules I Laid Down

These are the mechanics of a credit card that I explained:

• Keep the total usage of their credit card at or below 15% or 30% of the card’s limit… so for example if their card has a limit of $1000, then no more than $150 or $300 should be on the card at any given time. This is a nice time to ask the teen which threshold they prefer. Both are just fine, but it’s nice to know their choice and help them check in regularly for a year or so and see that they’re respecting it.
• 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.
• Check the balance on the card and its recent transactions regularly, to make sure that everything is correct and they’re staying below 15 or 30% usage.
• You can also consider asking them to:
  • have financial check-ins with you every month or every other month
  • share their login credentials, so you can see the balance on the card is where it should be

In Closing

This is a very personal decision, and case-by-case with each teenager in question.

So I can’t help you too much, Dear Working Mom… but I can tell you that you’ve got excellent judgement, and whatever decision you come to, it will be one that supports your teen.

And, like almost all other parenting decisions, the follow-through matters as much as the original decision.

So trust yourself– you will be able to make a good decision now, and you will also be there to check in regularly with your teen afterwards and evaluate if things still look the same to support your original decision.

All my best,

Wendy