Q. My teenage daughter is very responsible and the other day she asked whether she could have her own credit card so she can establish a credit record and score. I think this may be a very bad idea but she is insisting that it will help her in the future. I just thought about boys at her age so Im kind of at a loss. What suggestions do you have concerning this issue?
A. Your daughter sounds pretty financially savvy! I have some thoughts but I also decided to seek the perspective of a young adult (turns 17 this year), Michelle, an email buddy of mine. She began reading my financial columns at age 9 so she is uniquely informed regarding financial matters for her age and this also seems to be true of your daughter. I told Michelle I was going to write about establishing credit as a teen by using a credit card with a very low limit, asked for her comments and whether she had her own card.
To paraphrase, the following is what she had to say on the matter: I wouldnt have a credit card. They cause debt and if my mom and dad dont have the money to pay for something I can wait until they do or wait until I have enough of my own. I have a debit card and it does the same thing as a credit card but doesnt allow me to spend more than I have. Mom and dad place money on the card and that is all I can spend. It is also safer than a credit card because someone can only steal what is on the card. If I was writing about credit cards for teens, I would say it teaches people to not save for things they want to buy, allows them to get things right away and they end up paying more if they dont pay it off each month and are charged interest. This is a bad way to teach people how to handle their money. I dont think Id have a problem properly handling a credit card but many people would because you read about large credit-card debt leaving people in financial ruin.
I agree with everything Michelle said, but if, and it is a big if, your teenager can establish credit and obtain a good credit score early in her life she may benefit in the future from lower interest rates when making major purchases, reduced auto insurance rates, the ability to rent an apartment and it may even make getting a job easier.
Managing finances well demonstrates that someone is serious about taking personal responsibility for their actions as well as being financially responsible. What better time to teach this when she is still under your roof and you can coach and monitor her actions?
A good start would be to establish checking and saving accounts in her name. She should make withdrawals, deposits and balance her checkbook. Everyone should learn how to balance a checkbook and understand the perils of bouncing a check. She should also obtain a secured credit or debit card as Michelle has mentioned. Watch out for the fees on these, as some can be fairly high.
These actions will not help establish a credit history but they can demonstrate that she is responsible with money. Lenders like to see stability so this may help her obtain a low limit traditional credit card. Once she has her credit card she should charge no more than 30 percent of her available credit limit and pay the balance due in full each month. Limiting the use of the card to expenses that are part of her normal monthly budget is a good idea. Something such as gasoline that shed need to pay for anyway could be put on the charge card and paid off in full each month.
If she cant get a traditional credit card from a bank or a store, you could co-sign and get a credit card or loan in both your and your daughters names but I dont suggest this. Just one late payment would be disadvantageous to both of you and have a negative effect on both of your credit scores.
The greatest risk of the above actions is that she misses payments, bounces checks, etc., resulting in a negative credit history and a bad credit score. If this occurs, you and she would have been better off listening to Michelle.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624