Should Teens Have Credit Cards?

Article written for App to Succeed, Inc. – a non-profit organization that provides financial education and coaching for teens and their parents. 

A surprising 63% of American 18-29-year-olds don’t have any credit cards, according to a survey conducted by Princeton Survey Research Associates International(PSRAI) and funded by Bankrate. This is bad news for credit card companies as their future success depends on millennials using (and misusing) credit cards.

Prior to the Card Act of 2009, credit card companies could be present on college campuses as soon as the first day of class, offering giveaways in exchange for agreements. Though credit card companies can still solicit on-site with prior approval, the Card Act made it more difficult for anyone under the age of 21 to apply for a credit card. As a result, debit cards became the medium of choice for some parents who wanted their teens to learn essential skills like balancing checking accounts and budgeting.

Learning to use a checking account and debit card, instead of a credit card, to monitor spending can be a more effective method for teaching young adults how to manage their money. They will be less likely to spend money they don’t have and may even make the conscious choice to save when they see just how hard it can be to replenish that account with earnings from a summer job. 

A national survey of 42,000 first-year college students published by Higher One and Everfi, found a link between early credit card use and decreased levels of financial preparedness when compared to those who had experience with managing a bank account. This suggests a positive correlation between learning to manage an account and a young adult’s ability to be financially independent.

When the alternative is paying fees for missing due dates, exceeding the credit limit, or not being able to pay a monthly balance on a credit card, not owning one seems to be the smart choice.  The PSRAI survey found that millennials are most likely to misspayments completely and only 40 percent of this age group manages to pay their full balances each month, while over half of older adults do. 

Even so, nobody is immune to Annual Percentage Rates on credit cards. On average, young adults and adults through retirement age carry over $4,000 in credit card debtcombined. On a card with a high APR rate, it could take years to pay this off and cost the owner thousands of dollars in interest in the process. And if they are using several credit cards, these rates can really add up. We are all guilty of not wanting to read the fine print but, on credit cards, it’s a must. Setting up automatic payments can help, but for most busy, multi-tasking young adults, it’s only too easy to miss a due date.

But what about credit scores? Responsibly managing debit cards and checking accounts do not build the good credit scores young adults need to eventually rent an apartment in a major city or borrow money for a car, house and/or business. Currently the models for increasing credit scores are dependent on taking on debt (with an emphasis on credit card debt) and demonstrating an on-time payment history. 

Setting up a joint account or making a teen an authorized user on an existing account can help them build credit history, if they are educated on how and when to use it. A careful review of the monthly billing statement and breakdown of expenses can provide parents with this opportunity. Retail store cards can work to this end, as well, but only when used in moderation and with the understanding that many come with high interest rates.

Credit cards canalso provide better safeguards against fraudand allow for participation in rewards programs that can also be very attractive to a young person, especially those that like to travel. This can be beneficial as long as the young adult understands the details of the program and their own financial capabilities and isn’t swayed to overspend just to gain access to an attractive offer.

Though it doesn’t directly influence credit scores, having a job is a prerequisite to borrowing money. Without a steady income, young adults can’t pay their bills on time and can’t afford to continue to borrow. Not to mention, a job encourages them to, not only review spending regularly, but also to create a budget so they don’t overextend. This knowledge can only aid them in making good choices when they do decide to get a credit card.

Any kind of debt, though, can have a significant impact on how young adults view their financial future. It probably doesn’t come as a surprise that contemplating finances causes millennials excessive amounts of stress. A study of Millennial Credit and Finance published by Experian®last year found that over two-thirds feel that their personal finances are a hindrance to achieving goals such as buying a car or home, starting or changing a career, and considering parenthood. Even so, over 70% are hopeful about their future, regardless of the state of their financial situation. 

This says a lot about the perseverance of teens and young adults today as they continue to carve out a path that’s right for them, even amidst economic uncertainty and in the face of increasing financial challenges. 

So, should young adults own credit cards? The answer is yes, but only if they are fully prepared and understand what it takes to use them responsibly. Building good credit history is critical but, as we’ve seen, it’s all too easy for young adults to make poor choices that can lead to bad credit. With so much technology at their fingertips, young adults and parents can weigh the pros and cons of having a credit card, but nothing can replace a comprehensive education and experience when it comes to learning to manage their money. 

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