Financial experts have long said that teens should have access to credit cards, to some degree. Many believe that allowing a teen to have a credit card is an excellent way for them to learn financial skills they will need the rest of their lives. It can also help them to build a strong credit score at an early age. But, is it a good idea to hand over a credit card to a teen?

Credit CARD Act

Congress has stepped in and helped to make these decisions a bit more clear. Today, a child under the age of 21 must have a parent or guardian help them to obtain the credit card. The Credit CARD Act was put in place to help curb the number of young adults who get into financial trouble at a very early age due to poor spending habits. Now, a parent or guardian must cosign on that credit card before the teen can get it.

This is a good thing in most cases. Enter my son’s friend, Jake, who was 18 when he first received his first credit line a few years ago. My son told me one day that Jake had managed to buy himself a motorcycle on credit and was struggling to pay his debt back after losing his low end job. Not only had Jake struggled to meet this financial need, but he also had a hard time getting a college loan he could have qualified for because he had caused his credit score to drop. He owed too much money, more money than the bike was worth, too.

• My son and I had a long talk then about credit card usage. Specifically, we talked about ways to help start a strong financial future without running into problems that Jake had. Here are some of the things we talked about and how we approached the topic.
• My son asked if it was wise for him to get a credit card to help him to build a credit score. He said, “you can trust me to make better decisions than Jake.” I did trust him, but I knew temptation was a big factor.
• We discussed what he would use such a credit card for, “not big purchases like Jake did, mom.” Rather, he suggested that perhaps he use it to pay for gas for his car and nothing more. He could easily pay that credit card balance off in full each month.
• We talked about how else to build a good credit score, such as making payments on his vehicle (which he is named as the owner of and holds the loan with a cosigner on) and how he could minimize risk to his credit score by not requesting numerous loan offers.
• My son brought up the fact that a secured credit card could be a good idea for some teens who would otherwise not be able to establish their credit rating. These credit cards require a deposit be made to establish the credit limit. This way, the teen could not get into too much trouble financially.
• My son then came to the realization that it would like be 10 years before he wanted to get a home and therefore he was not too concerned with improving his credit score right now. “Why should I pay interest to someone else when that money could be in the bank earning money for me,” he said.

As you can see, we are lucky in that our son has a strong financial background and understands the importance of maintaining a good credit score while also using credit cards wisely. However, it is important to also understand what their needs and desires are. By simply having a conversation with your son or daughter about credit cards and the consequences of using them poorly, you can really see what their opinions are and correct them.

Whether you believe kids should have credit cards or not is a decision you need to make. However, the new laws make it the parent’s job to talk to their child about credit cards before agreeing to cosign for one.

The new year is a great time to open a checking account for your teens if they don’t already have one, and establishing credit for your college student kids. And for both age groups, get them started using a debit card and fostering the habit of tracking and understanding their spending habits.

It’s never been a better time to open these accounts because the features in student cards are more solicitous than ever. And while your college student is still home on vacation, you’ll have the time to sit down together to walk them through how to do everything online, rather than trying to go over it on the phone.

That said, there are a few very important habits your kids need to get, and get quickly, in order to protect their identities and their credit. So even if your kids already have accounts open, use this time to teach them four important security habits.

Good security habits in an electronic payment world:

1. Check your account online daily, whether it’s debit or credit. This is not just a good security habit, it doubles as a good fiscal habit. There is zero reason not to do it. It’s especially important to check debit card account activity because in some cases, if there‘s fraud–someone stole the card number at school and managed to use it–consumers must notify financial institutions promptly, in order to be fully refunded by the financial institution. With credit cards, there’s no time limit. Credit card purchases are always protected against fraud.

2. Teach your teen good storage habits for their card. Don’t leave them lying around. If they don’t have a wallet, encourage them to get one. Cards that are kept in a pile on their dresser, and stuffed into jeans pockets, get lost easier. Plus, good storage protects the magnetic stripe and creates good caretaking habits for all things monetary.

3. Do not lend a debit card. This may seem overly strict or paranoid, but say your teen and a friend are pulling into a gas station. One pumps the gas and the other runs inside for a soda. Teach your teen to be the one to go in, rather than handing a friend the debit card to use on their behalf. This is not to say the friend is untrustworthy. Again, it’s the notion of habit. Your teen should think, at all times, about security with debit and credit cards. Keep it in your own safe possession.

4. Encourage kids to use ATMs that are in a busy location, not ones that are isolated or unwatched by security cameras. That really goes for any kiosk, or even gas station, that accepts credit and debit cards. Have them wiggle the card reader (where your swipe) to make sure it’s not a scam one hitched on the top of the real one. It’s an easy habit to get into. There is unfortunately card data theft out there, and they should be careful. I try to use the ATM of my financial institution as well–which is also a great money saving idea because you pay no ATM fee–because your own financial institution will take better care of you if there is ever a fraud problem.

The sooner kids adopt these habits the better. There’s no question that debit and credit cards are a huge convenience, benefit, and can teach great money habits because you track all of your spending. Having them is also crucial to being monetarily function in our society. And so are good security habits. Try them out yourself, too!

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I’ve decided I’m going to invent a board game. Forget Monopoly, let’s play Bankruptcy. Actually, the game is called DEBT. My husband says Bankruptcy is too harsh.

We can teach kids about budgets and keeping records and drafting ledgers, but unless we put into practice paying off debt when there’s no money left at the end of the month, we’ve fallen short.

The whole point about crushing debt is that there is no money to pay it off. Yet we have to, or we’re trapped for life. Could there be a more perfect time for this game? They can see the micro in their own homes, the macro in our economy.

So here we go, a game to teach them about paying off debt. And hopefully, when they see how hard it is, they’ll be more mindful about living within their means to begin with.

When I talk to my students about living within your means, I always start by saying that when I learned about money management and buying a house, the popular thinking of the day, way back at the dawn of time, was that your monthly nut for your mortgage shouldn’t be more than 20 percent of your income.

Ha. That percentage inched its way up to 50 percent (and sometime more!) by the time the mortgage crisis exploded last year. An impossible situation.

The game:
Rule 1. Create a fake ledger with these variables of monthly expenses:

• Rent
• Food
• Car insurance
• Health insurance
• Utilities–gas, electricity, landline phone, water, cable/satellite TV
• Transportation
• Cell phone
• Clothing
• Entertainment
• Savings

Rule 2. Estimate monthly costs for each: Break them down very granularly, with dollar amounts assigned to line items, such as gas money under transportation. (You’ll see in a moment that by doing this, teens see what they might have to give up in order to pay off debt. They may have to lower that whole category cost by taking the bus instead of driving a car). Have your teen or college student do this. It’s interesting to see what prices they come up with. They can research online, too.

Rule 3. Whatever the total of all monthly costs equals, tell your teen that’s their monthly revenue. The point is, all the money that comes in is devoted to one of the 10 items above.

Rule 4. Now tell them to add a separate category called DEBT. Tell them this is credit card debt. Make the amount equal to their yearly salary, in this example. Tell them that every month, they’re going to need to pay some of this debt off. I use credit card debt because it’s the most popular debt in America, and I personally believe that revolving credit is one of the worst fiscal habits humans have.

Also credit card debt is dangerous and they should know that. Nothing ruins your credit rating worse than bad credit card debt, or even carrying too big a balance for too long. These days, a big balance that affects your credit rating is $1,000. Not too long ago, it was $10,000. Talk about a barometer of the economy and how risk averse lenders are.

Rule 5. Have them roll a die, a regular die with numbers up to six. If they roll a one, they have to pay toward credit card debt from one of the categories above, and they have to pay at least $1. So, for example, your teen rolls a 1. They may choose to take $1 from the Savings category, and send it off to pay the credit card debt. They keep score by subtracting from the debt total. So, say their total debt is $5,000. Now they owe $4,999. You can have as many players as you want, and first one to pay off their debt wins.

Another example for clarity sake: If they roll a 2, then they have to take at least $1 from two categories, so maybe Savings and Entertainment. And so on for rolling a 3, 4, 5, 6. They can choose to pay more than $1 any time they want. That’s part of the strategy. Now, they have to still pay rent, and insurance, so they’ll quickly learn where they can and cannot cut corners.

Rule 6. Another variable in the game is that players can “get a side job.” Once players have paid at least $100 toward their credit card debt, they make take a turn by getting a job instead of rolling the die. The job pays twice as much as the debt they’ve paid at that point. So, for starters, their monthly salary is $200.

This is a strategy point as well. Some kids will start the game off by being reluctant to take money away from their fun categories, peeling off only a dollar at a time, minimum requirement. But some kids will quickly learn that if they drain all savings and entertainment for just one month, they’ll get a job and pay off their debt faster, which in turn ultimately gives them more money to spend and save from that point on.

Rule 7. To lower expenses: Earlier I used the example of gas money becoming unaffordable as you pay off debt. Driving a car affects two expenses: gas and car insurance. So, for ambitious players who want to pay off all debt faster and win, they may say they’ll give up driving for a while and take the bus. They need to calculate what that tradeoff will cost, and on their turn, wait to roll a 2 and give all the gas and car insurance money toward paying off the credit car. Later in the game, if they have a job and all is rolling along, they may decide to reinstate their car.

You might be surprised how this can mimic real life.

Please try this game at home, and I encourage adults to play with your teens. Let me know how it goes.

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I had a very good friend visit from overseas last year. She was here on an extended stay, almost a year—not at my house, thank goodness, because there’s a sure fire way to damage a great friendship. Her husband is an oncologist connected to the government, and he was doing a rotation here. Part of the deal was that she wasn’t allowed to work in the States. Other countries become concerned that they’ll foot the bill to send their talent to the States to gather knowledge, but then that talent will decide to move to the States permanently. To prevent that, they try to cramp lifestyle and viability.

So my friend, a sharp management consultant, was left with a lot of time on her hands. And here’s what she discovered: She could wake up every day and find a company in the United States to send her money, just by making a phone call—phone companies, any number of Visa issuers, cable TV, airlines. The list was endless. What a phenomenon. She kept a journal of it, and when she emailed me the other day, she happened to have found that journal in a drawer, and we shared a good laugh.

And then a moment of silence. She made close to a thousand dollars that year, in found money. More if you counted the cash value of the frequent flier miles she accrued. That rather short moment of silence ended with me realizing that her little hobby could be transformed into the mother of all comparison shopping lessons for your teen, especially if we zoom in on one area at a time, so we’re comparing apples to apples.

Here’s the gestalt of the whole lesson: The reason my friend was able to collect money just for getting on the phone is marketing, of course: free trials, giveaways, rebates (her favorite), rewards for switching companies, etc. You find the companies that want to win you over, and they’ll give you something for choosing them.

So let’s start with credit cards, because they’re expansive, with a lot of variables, but at the same time uniform. You’re going to let your kid, the one you won’t even trust with your credit card, research the universe of credit cards out there, and decide which one is best for you. Do you have the one most suited to your needs right now? If not, which one should you switch to?

My husband of course cringes at these sorts of lessons, and since getting his little anti-identity theft photo on his credit card, he’s been in love with his card. His reaction was no way, no one is changing his card. That’s okay. If you try this lesson out, and encounter the same sort of resistance, fold it into the lesson. One of the main reasons people miss out on good opportunities is resistance to change. Make your teen ask your spouse to list what he or she likes about the present credit card, and those things become some of the must-have variables in the comparison shopping exercise.

So here are 5 steps for teens to shop around for a credit card:

1. They should interview the household and find out what the articulated needs are. Include what cardholders like and don’t like about their present credit card.

2. They should write down a short-term or long-term wish list of benefits and see which is more weighted. My mother used to say it’s better to buy a few expensive, very well made outfits that you can wear anywhere and that will last, rather than a closet full of cheap clothes that will fray and wear out after a few washes. Whether that standard applies to credit cards is up to the household. Some people are happy switching their credit cards every few months to keep interest-free revolving credit. One of the best lessons teens will learn is that there are short-term and long-term benefits when comparison shopping anything.

My overseas friend didn’t mind calling a different phone company every month and switching her service in order to get the new-customer freebies. Your teen has to calculate what benefits exist for the life of the card, what are the diminishing benefits, such as an introductory interest rate that ends up being a higher than an average rate after a few months.

Then your teen has to apply that calculation to the realities of the project—such as what happens to your credit rating, if anything, if you switch credit cards too often. And the human element: Will family members get annoyed, or not mind at all. If frequent flier miles are the main benefit of any card, then switching cards a lot won’t work.

3. Teens should go online and start making a list of all available credit cards. Have them make a chart of benefits: interest rate, frequent flier miles, shopping rewards programs, affiliation cards (cards co-sponsored by a company, including airlines). Then have them chart shortcomings of each card. This is a good pre-lesson for writing balance sheets, which we’ll do in another blog. Teens need to think in benefit/liability terms.

4. Get on the phone, ask more questions and verify online research. Ask if there are any other offers not shown on the website. When I’m teaching college students, I’m constantly reminded how hard it is for them to get on the phone and ask questions of strangers. I often assign fieldwork, where they need to corroborate research they find online by calling. It’s always hard for them. I always have to nag and remind them. For younger kids, it’s even harder.

Remember, it’s like questioning authority to them. Any adult gets on the other end of the phone, and they feel like they don’t have a right to question. That’s why it’s such a good lesson, though, and great practice.

5. When they pick a winner, or two contenders that may be very close, have them present their case to the household in a formal oral presentation. They should have a chart that backs up what they’re saying. The presentation part is very important, because it organizes thinking in a way that nothing else does, and they need to be able to answer questions on the spot.

By the way, GiveMe20.com also has some advice and information for kids on different types of cards, things to look for when choosing a card, building credit and much more.

Please share stories if you try this at home.

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