Your Teen’s First Credit Card

This post is part of a series on credit cards. To read more about paying off credit card debt, go here. For more on credit card rewards, go here.

Dave Ramsey is wrong (about this)

When is it time for your teen to get his or her first credit card?

If you’re talking to Dave Ramsey, he would say: never.

Dave Ramsey has educated many people about finances and help people get out of massive debt. But some of his advice, especially once people understand money, is misguided.

Credit card use is one of those.

Responsible credit card use can build a good credit score, which can save a person thousands of dollars in interest & other fees. That’s because those with the highest credit scores get the best rates for things like mortgages, car loans, and other credit.

Credit cards can also be convenient and helpful in tracking your spending. They also offer protections (and sometimes insurance) that debit cards and cash don’t.

Finally, there are a lot of rewards to claim and leverage for free travel, cash, and other perks. But that’s only true if you easily pay off your credit card bills each month.

But …

Many people may be skeptical of getting or helping a teen get a credit card. That’s because most parents have made mistakes in the past when it’s come to credit card use and debt.

Many parents today came of age at a time when credit card companies handed out free t-shirts or pizza to students willing to sign up, and those college kids racked up either small or giant amounts of debt, without much, if any, income to pay it off. (This wasn’t me, but it could have been. I graduated college a few years before all the free t-shirts/pizza offers became common).

Giving a credit card to someone whose frontal lobe is not fully developed seems foolhardy at best.

Hear me out.

When a teen lives at home with parents is often the best time for them to practice using credit cards, paying them off in full every month, and tracking their spending. The right mindset when it comes to credit cards (and just money in general) is a gift to your children.

But let’s assume you’re a parent. Maybe you’ve made some financial mistakes—as we all have—but you want to help your teen have a better handle on finances from a young age.

One of the best ways is for you to help your teen get a credit card.

When is your teen ready?

But when is the right time?

Your teen is ready for a credit card if he or she:

*is generally responsible.

*makes money from a job.

*understands how credit cards work.

*resolves to pay the credit card in full and on time each month.

In our family, that is usually right around the time a teen starts driving. At that point Mom & Dad want them to carry a credit card (for us, Discover is our first credit card–see below for more details on how we did this) to get gas in the car that they are driving.

Once they are driving, they can also make random Aldi runs for me, and pay with the credit card. There are a lot of downsides to having a teen driver in the house (hello auto insurance). I take my upsides when I can get them.

Pros and Cons

Why should your teen get a credit card? A credit card can help a teen:

*develop the skill of navigating online bill-paying and other credit card basics.

*practice responsibility, consistency, and other important money values.

*help them track spending and categories easily,

*begin to develop a good credit score.

Building a good credit score is easily the most important reason for a teen to have a credit card.

“Length of credit” is an important element of a person’s credit score, and having a card from an early age is the way to do that.

For instance, my length of credit is well over 30 years, starting from the first Discover card I obtained right after college. My oldest daughter has a perfect track record in paying her credit card bill on time, but her credit score is about 100 points lower than mine. Why? Because my length of credit is longer.

In fact, in the distant past, I definitely forgot to pay my credit card bill occasionally, racking up late fees and interest. But my credit card money mistakes were so many years ago. Therefore, none of that shows on my credit score, and the length of time I’ve been paying bills (my “length of credit”) affects my credit score positively.

What are the cons of a teen (or anyone) having a credit card?

*it’s easier to spend more on credit cards than when using cash. This has been proven in study after study, but there are ways to help avoid this.

*it’s possible to overspend beyond your needs. That’s because you don’t actually need to have the money “on hand” or in your bank account to buy things with a credit card.

*if you do carry a balance, compound interest can create an either really bad, or potentially catastrophic, financial hole for a person to get out of.

You can be the “training wheels” for your teen to learn some of these basic skills.

How we did it

Let me explain how we did this in our family.

(I’m not sharing this because we are perfect in any way with our finances, or with raising our children. But, many people have found our approach helpful, and you may, too).

First, when a teen at our house begins to drive, they become an authorized user on our “family” credit card. This is a Discover card we opened specifically for the kids in our family, I asked Discover to give it a very low spending (credit) limit just out of an abundance of caution.

I chose Discover because it was my first credit card back in the last century. I’ve always been happy with their customer service; some of their alert features are very helpful for the purpose of monitoring credit card use; I love the Cash Back program (that doubles its payout in the first year, a definite advantage). I’m not sponsored in any way by Discover card, but I am a fan.

So, teen one becomes an authorized user on the “Family Discover.” I am the “owner” of the account and have the only access.

I set up alerts so that I get a text message whenever a purchase is made on the card, when it nears its spending limit, when the bill is due, and if anything changes about the account in any way. This is what makes Discover very helpful, as their text alerts are very specific. Some other credit card alerts only share “A purchase was made on your card.” Discover shares the amount, the purchase location, pretty much right when the purchase is made.

At first, I show the teen how I pay the bill every month.

Shortly thereafter, the teen & I both have the login information, so that the teen can pay the bill. This allows the teen to navigate bill paying, and learn about online bill pay and other features.

If the teen makes any purchases for me (like the before mentioned Aldi), I Venmo (or transfer) the money over.

At this point the teen is responsible for paying the bill in full. And the alerts still come to me, so I can see that the bill is paid on time. I can also see any charges or changes that are made to the account.

After a year or more of this, Mom & Dad have a discussion with the teen about getting a credit card solo. If the student is over 18, they can get the credit card without permission. But we find it helpful to have the discussion again about the benefits and potential pitfalls of credit cards.

Is my teen ready?

If you think you are ready to get your teen a credit card: first, that is a question only you and your family can answer.

Let me start by saying, don’t rush into anything.

Perhaps read this article together or others about credit cards, and the pros and cons of using them. If you do decide to go forward, here are some basics:

*apply for the card that is best for your situation (ignore card offers that come in the US mail or e-mail. Just to count I’ve started saving unsolicited mail we receive from credit card companies, and it can be dozens in a month.)

*seek out no annual fee, modest cash back/rewards profile.

*know your credit limit (and how it will be raised), but that it is NOT meaningful.

*resolve to spend only what you are willing to pay off in full and on time each month.

*set goals for low spending.

Challenge your teen to budget their own amount for discretionary spending, like eating out with friends, or shopping at Ulta. (Not that we have any experience with teens shopping at Ulta at our house, she said ironically).

*know the APR (annual percentage rate—interest).

This is helpful so that a person knows how much it would cost to carry debt on the card. In fact, many credit card bills list the “minimum payment due.” They also explain how long it would take to pay it off at the rate of the minimum payment. It can be pretty shocking.

*audit spending regularly to check for “overspend” or mindless spending.

Encourage your teen to go over his or her credit card statement, ideally every month. That is so you can both check charges, see if perhaps the teen overspent any areas because it was easy with a credit card. We’ve all done a $100 Target run that started with just needing toilet paper. But being aware that this is a risk and seeing how you have done it, is useful.

*be strategic from the beginning on cash back/rewards.

Key takeaways

So, to review some of the big takeaways from this on credit cards, both for you and for your teen:

• having a credit card while still living at home with you can be a great form of “training wheels” for financial matters. This is especially helpful in paying bills and understanding how credit cards work.

• the Discover card is a great first card for a young person to have, because of its CashBack program. (The Cashback is doubled the first year you hold the card). But there are plenty of others that would work well. Consider credit cards that you, as a parent, are comfortable/familiar with.

• credit card spending limits are meaningless. Both you and your teen should understand that just because there is a credit limit of $500 or $1,000, that should never be spent unless the money is available to pay the bill.

• the number one rule of credit card use is to pay your bill in full and on time each and every month.

Starting teens off with that mindset is a gift to them.

There are so many people, people who have had times in their lives that they had credit card debt or didn’t pay their bill in full each month. But I predict that every one of them would say that they wish they had started off paying their bills in full and on time every month.

I hope that you found this guide useful and helpful in considering some of the pros and cons of a person’s first credit card. Responsible credit card use is a skill that can be learned. When learned properly, the use of credit cards can be convenient, rewarding, and useful.

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(This post is not sponsored by any credit card company, but I do talk about my positive experience with Discover Card. If you use the links in this post to sign up for a Discover card (like this one, we will each get a $100 credit). See my complete disclaimer policy here.)

You can visit the YouTube video version of this post here.

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