Teaching kids how to use credit cards

New prepaid credit cards for kids can help young people learn how to use plastic wisely.

If there’s one thing that makes parents more nervous than picturing their kids with the car keys, it’s imagining them with a credit card. Yet in recent years, the number of teens using plastic has increased dramatically as credit-card companies actively pursue young people with applications in the mail, at college fairs and especially on campuses, where students get T-shirts and other free gifts for signing up.

Your kids are a target
It’s not surprising that card issuers are targeting teens -- kids aged 12 to 17 in the U.S. spent over $100 billion in 2004. And according to a poll conducted by Coinstar Inc., the average teen reports plunking down more than $250 a month. The question for parents is this: Does having a credit card teach a teenager to use credit responsibly, or is it simply the first step toward a lifetime of debt?

The answer lies somewhere in the middle. There’s no question that some college students -- like some adults who should know better -- use credit cards irresponsibly. So getting a credit card at age 16 and starting with a low limit of $500 or so may indeed help teens learn to budget, and teach them that reckless spending has a high price.

That logic, however, doesn’t always hold up. According to a recent study conducted by the Jump$tart Coalition for Personal Financial Literacy, about a third of high-school students have used a credit card, either belonging to their parents or issued in their own name. Yet when questioned about how credit works, these kids actually scored lower than their peers who had never used plastic.

When teens start asking for a credit card, it’s therefore important to help them understand some basic facts. Here are some practical ways you can help your kids learn how to use credit cards with care.

• Credit cards have higher interest rates than almost any other type of borrowing. This means higher costs. For example, it costs $15 a month to carry a $1,000 purchase on a card with an 18 percent interest rate.
• If they make only the minimum payment each month, their debt will keep growing, even if they don’t make any other purchases.
• If they miss any payments, their credit rating will suffer and they may have trouble getting a loan or apartment lease in the future.

• You can order an extra card in your teen’s name and link it to your own account. Any purchases will show up on your statement so you can keep an eye on your teen’s credit card habits. By agreeing on a pre-set spending limit, and holding them responsible for paying off the charges each month, you can help your kids learn how to budget.
• Some credit-card issuers also offer prepaid cards designed specifically for teens, such as Visa Buxx. These cards work much like an allowance: You load them with a fixed amount of cash, and when it’s gone, so is your teen’s spending power. While these cards don’t actually extend credit or charge interest, kids who use them may learn that charge cards are not a license to make unlimited purchases.
• You can suggest that older teens who are earning income and applying for a credit card in their own name ask to have the card linked to their own bank account, so the whole balance is automatically paid off each month. This way they can start building up a good credit rating while avoiding hefty interest charges on an unpaid balance.

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