Giving a credit card, especially to youngsters who are prone to impulsive purchases, might seem a risky proposition. However, some believe, if proper checks are in place, it can also be a good educational tool. What’s the right approach?

Let’s understand the pros and cons of giving a credit card to a teenager:

teenager credit card

Advantages

It can help in emergencies

Carrying loads of cash is unsafe. Instead, if the teenager has a credit card it helps in case of emergencies – be it a flat tyre or any medical emergencies. Also knowing that they are prepared to take care of any contingencies gives you peace of mind. 

It may teach them to use credit responsibly

It could also potentially help inculcate the right financial habits early in life. By giving credit cards, you can teach them the importance of matching expenses with income and living within one’s means.

What if one overspends? You can explain the financial consequences of not paying the bill and how it could snowball into a debt trap, if left unchecked. Additionally, warn them about the impact of poor credit history on future borrowing rates. 

It may help set boundaries

Credit card companies don’t issue credit cards to those without an income. So, you will have to request an add-on card for your son or daughter. Having an add-on card has its benefits. For one, you can set credit limits for an add-on credit, so that there aren’t too many expenses. Moreover, you get to monitor their expenses as the bills will ultimately be paid by you. 

By setting limits on spending, you can control their excesses. 

Disadvantages

It may encourage instant gratification

Giving the power of credit to teens could encourage instant gratification among them without understanding the merit of labour. If given a free rein, it can have deleterious consequences in the long-run in the form of impulsive buying and unhealthy spending habits. 

Also bailing them out whenever they overspend could prove counterproductive. They might possibly grow up to become financially dependent or irresponsible. 

It may lead to indebtedness

The bill has to be ultimately paid by the parent. Unchecked spends can make family finances vulnerable. Families which are already running high on debt will end up accumulating more debt on their credit cards. It is the costliest among all categories of debt and could potentially drag one into a debt trap. Besides, a default or two in repayments affects credit score and the ability to borrow at lower rates in the future.

What is the right strategy?

Does it make sense to give your teen daughter or son a credit card? It depends a lot on the individual. If the teen is known to be impulsive, it is better to test the waters. 

Teach them how credit cards work and the importance of paying bills on time. Show them your credit card statement and familiarize them with different items on the bill –the minimum amount due, total outstanding, interest rates and penalty charges. 

For instance, open a bank account in their name and give them a debit card first. By controlling the money transferred to their bank account, you can control their overall spending power. Alternatively, consider linking financial apps to their bank account. If need be, you can make quick transfers to take care of emergency requirements. 

Financial lessons

The basic idea is to let them understand the connection between cash and credit and how well they manage their finances. Once, you see them be responsible with spends, give them a crash course on credit. 

Teach them how credit cards work and the importance of paying bills on time. Show them your credit card statement and familiarize them with different items on the bill –the minimum amount due, total outstanding, interest rates and penalty charges. 

Once, they get a hang of it; give them an add-on credit card with a limited credit line. Make it clear beforehand the kind of expenses that they could take care of through the card. Additionally, monitor their expenses whenever the monthly statement is presented by the card company. Pull them up for any digressions. 

Many teens do a side-hustle besides receiving pocket money from their parents. By making them pay a part of their bills, you can make them financially responsible as well.

Of course, while giving a credit card, have an exit strategy in place – to revoke it if the teen continues to err. Or if she has graduated or finds a full-time job. 

Takeaway

Credit cards should be viewed as a convenience and given only to teens who demonstrate responsible spending behaviour. By teaching them the importance of living within one’s means, you can help them inculcate responsible credit habits early in life.