Getting Teens to Understand the Money Behind Credit Cards

If most teens are anxious to grow up, then getting their own credit card, or at least some version of payment plastic, may be the brass ring of adulthood. And like a lot of other things these days, from makeup to cellphones, teens are getting their hands on prepaid cards and debit cards earlier and earlier -- sometimes before they even hit middle school. We know they want plastic, but are they ready for it?

Maybe not. According to a 2011 Charles Schwab survey, while 42 percent of teens already have their own debit or ATM card, only 35 percent of teens feel like they know how to manage a credit card. Even fewer understand how credit card interest and fees work. One in four U.S. teens thought a debit card was for borrowing money from the bank, not spending their own.

Reality check: Sooner or later, a credit card is in your kid's future. (The Credit CARD Act of 2009 puts age 21 as the minimum, although teens with their own income can get approved at age 18.) That's why some parents have opted for a trial run with the training wheels version: a prepaid card, debit card, or co-signed credit card for teens as young as 12 or 13.

But when and how to do it? There's no hard and fast rule. Michelle Dosher, a spokeswoman for the Credit Union National Association, signed her eighth-grade son up for a debit card "We saw this as an age that our son would be starting to do more things with friends and that we wouldn't always be with him to pay for things," she says.

Bill Hernandez, the president of SpendSmart Payments, which markets a prepaid MasterCard to teens, agrees that "around 13 is a good age to teach them to use plastic," although he adds that "a lot of kids have it earlier."

But to Laura Levine, president and CEO of the Jump$tart Coalition for Personal Financial Literacy, some teens aren't capable of handling plastic until they're older. Some parents aren't either. "Sometimes I say that the question isn't whether the student is ready for this, but whether the parent is," Levine says, pointing out that parents who sign their kid up for a debit, prepaid, or joint credit card account should expect to provide hands-on monitoring of their child's spending. "We don't turn the car keys over to our kids and say, 'Let's see if you can learn how to drive this thing.' With a credit card it's the same thing."

Why teens don't understand plastic Part of the problem for teens is that spending with plastic makes money "invisible." "From the time our children are preschool age and they come with us to the store, they never see money change hands," says Levine. "They might see us swipe a card, but they think, 'Oh, this is a magic card, you swipe it and you get whatever you want.'"

To be fair, "invisible money syndrome" affects grown-ups too, who tend to spend more money when they pay with a credit card than when they pay with cash. One of the reasons I got into trouble in my 20s was there was such a disconnect for me between that piece of plastic and money," says Beverly Harzog, author of "Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made." "It felt like everything was free and I would just worry about it later."

To counteract the effect, financial literacy experts counsel parents to start younger kids out with cash allowances, so they learn that money is tangible, has value and can be exchanged for things they want. And try narrating at least some of your plastic transactions when you know your kid is watching -- by saying something like, "I put my paycheck in my bank account, and when I use my debit card it automatically takes out the money," or, "Every time I swipe my credit card the bank keeps track, and at the end of the month I get a bill that I have to pay."

Picking the best starter card No matter how old your kids are when they get their first card, picking the right one boosts their chances of handling it successfully and avoiding major disasters. Consider these options:

Debit cards. They're Harzog's pick for teens starting out, partly because debit cards are connected to a teen's own checking account, which makes the process of depositing and withdrawing money more concrete. "I think there's real value in taking your kid when they're a teenager to the local bank, introducing them to the manager, and letting them see how banks operate," says Harzog. "If they want to make a deposit, go with them and show them how to do it." Being physically there helps them mentally connect the money they put in the bank with the money they're spending. "They realize, 'I can use this debit card to buy pizza but it'll come out of my account.'"

Teen-proof it: Get overdraft protection on the debit card. Your teen will get charged a fee if he tries to write a check or make a debit purchase without enough in checking to cover it, but otherwise "your son or daughter could get hit with a huge nonsufficient funds fee for literally purchasing a bottle of soda," says Dosher. "It then can snowball -- every little purchase from then on can trigger another NSF fee until the teen figures out that there isn't enough money in his or her account." Ask if your bank or credit union offers a free student checking account with no minimum balance requirement; just make sure it offers access to online or mobile banking, which will help you keep tabs on how much your kid is spending.

Prepaid cards. Although they function like debit cards -- you deposit money, then spend only what you have -- prepaid cards don't require a bank account and tend to have more features than a regular debit card, including instant emergency money loading (handy when the car breaks down). Among the one in 10 adults who regularly use prepaid cards, 73 percent feel it's safer than cash, and 72 percent say they like that it makes it impossible to spend money you don't have. Hernandez suggests that for young teens, prepaid cards are even better than cash because parents can track spending, and "because they can't get in real trouble with it. It's a very safe way for them to learn about how to use plastic versus cash."

Teen-proof it: Opt for a card with parent-friendly features. For instance, the SpendSmart Prepaid MasterCard sends parents real-time texts about spending and lets them lock the card instantly. Just watch out for hefty fees for everything from ATM withdrawals to inactivity.

Co-signed credit cards. For your teen to get a real credit card, you'll have to co-sign for it, which can get dicey: If he blows off paying the bill, it'll ding your credit score too. But unlike simply adding your child as an authorized user to your card, getting him his own helps him build a credit history, manage credit and learn to responsibly pay end-of-the-month bills. Some card issuers, however, including Capital One and Citi, don't allow co-signed cards for teens; most others won't consider it for a child under age 18.

Teen-proof it: Make sure you opt for a card with no monthly fees and a low credit limit, such as $500. Help your kid create a plan for paying the bill on time, but check the online account yourself and be prepared to do a little nagging if necessary.

4 ways to know your teen is ready for a card Age may not be a perfect indicator of when your teen's ready for his own card, so look for a few other signs he can handle it:

1. He's a saver. Seventy-seven percent of teens think of themselves as big savers as opposed to big spenders. As long as your teen's one of them, he probably won't go crazy with a credit card.

2. She got a job. "When they get older, particularly when they have a first part-time job, open a checking account for them and get them a debit card," suggests Harzog.

3. He understands basic financial concepts, like budgeting. Most schools don't offer a financial literacy curriculum, so enduring a few DIY lessons might be the price your kid pays to get his own card. Check out MoneyAsYouGrow.org for ideas on what your teen should know now.

4. She makes her own spending decisions. If you want your kid to learn to make smart financial choices, you can't micromanage every expenditure. According to Levine, a kid who's used to buying stuff on her own, even if it's just during a trip to the mall with friends, is probably more ready. "Are they out making some of these decisions on their own? That's a good point to introduce cards as a tool."