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In a 2019 survey by EverFi, only 35% of students surveyed had taken a personal finance course. That leaves a big financial literacy gap for parents to fill.
By this point, you know teaching your teenager financial literacy has to be practiced to solidify lessons they’ll take into adulthood. Before heading into the real world, it’s best to practice in a controlled environment.
You can do this one of two ways–by getting your teenager a credit or debit card. Which one should you choose? We’ll go over the pros and cons of each so you can help your teen prepare for adulthood.
Should I Get A Credit Card For My Teenager?
When most parents see “credit card” and “teenager” in the same sentence they automatically think it’s a recipe for disaster. Anyone would. Even adults shy away from using credit cards. But what if I told you that your teenager could learn to use this power for good?
With your guidance (and your cosign), your child can learn how to use credit early on so it isn’t a hindrance for them later in life. Think about how different your life would be if someone taught you to use credit as a tool.
If your teen is absorbing lessons on building credit and knows the cost of borrowing money, you can gradually introduce them to credit cards. Start by adding them as an authorized user without a card. Then give them a card once they grasp the fundamentals.
You’ll still be able to monitor transactions and they’ll learn valuable lessons. Just make sure there’s a smaller credit limit.
Then they can get a credit card in their own name with a secured credit card or student credit card. Learning to manage credit early puts your teen light years ahead of their peers. However, you’ll still need to consider potential pros and cons before your final decision.
Pros Of Getting A Credit Card
Think back to when you tried to get your first apartment or car without your parents. Like most people, you probably got declined until you built credit another way, got a high interest rate on the car, or asked your parents to cosign.
Save your teenager the trouble of needing credit to build credit. Start them off early and they’ll skip many of the credit hurdles their peers will face. Plus, when it’s time to step out on their own, they likely won’t need a cosigner on their application.
Using Credit Responsibly
Most adults struggle with credit card spending for one reason or another. You can keep tabs on your teen and guide them through using credit cards responsibly so they don’t get caught in the debt trap that it becomes for many people.
Instead, teach them how to maintain a healthy credit utilization and show them how using a credit card affects their credit score.
Better Consumer Protections
Credit cards have better fraud protections. Your teen is still learning not to lose their debit card and learning which websites are too sketchy to enter their information on. Protect them by making sure they aren’t held liable for fraudulent purchases.
While you can dispute transactions on a debit card or prepaid card, you won’t always get your money back from the bank. With a credit card, your liability for fraudulent purchases is limited to $50 by federal law.
Cons Of Getting A Credit Card
High Credit Limit
You’ve already built credit and demonstrated your ability to repay debt. Your credit card issuers give you a high credit limit reflecting that. When adding your teen as an authorized user, they’ll automatically get access to your credit limit. Yikes!
While some consumer credit card companies allow different credit limits for authorized users, not all of them do. So your teen gets access to all of your spending power and you’re still responsible for paying the bill.
Before getting your teen a credit card, check that your credit card issuer will lower the spending limit for secondary users. One of the only credit card issuers that does this is American Express.
Whether you’ve chosen a secured credit card for them or added your teen as an authorized user, they might make the mistake of holding a balance instead of paying it off each month. That means they’ll experience the negative side of compound interest.
It’s a valuable lesson, but not one you want to see up close.
Potential for Irresponsible Choices
If your child is just getting used to a prepaid debit card and managing money, then a credit card might not be right for them. There’s potential for misuse if your teenager is given the responsibility of managing a credit card before they’re ready.
However, if they’ve demonstrated responsibility with managing their part-time paycheck using a teen debit card, perhaps it’s time to add them as an authorized user to one of your credit cards. You can also choose to cosign for a joint credit card.
Should I Get A Debit Card For My Teenager?
Most parents would still be skeptical about their teenager using a credit card. In this case, a debit card is a much safer option to start with. This is a great opportunity for teens to learn how to reach savings goals, budget, and manage their money.
Debit cards solve a variety of issues for teenagers and their seemingly constant requests for money.
- Conveniently send money without an ATM withdrawal
- No credit card debt
- Increased purchasing power
Most banks offer prepaid debit cards and teen checking accounts for people as young as 13. You may find some banks where the age limit is lower. Ultimately, the decision to get your teen a debit card depends on their ability to handle responsibility and money management.
Pros Of Getting A Debit Card
No more trips to the ATM for allowance money.
No more raiding the house for last-minute money requests.
No more random charges on your debit card for game subscriptions and online purchases.
With a debit card for teens, you can almost instantly send them money electronically and log in online to see what they’re spending it on. Plus it’s much safer than sending them out with cash.
Basics of Budgeting
Practice makes perfect. When you get your teens their own debit card, they get acquainted with concepts like saving towards a goal, spending within a budget, and timing bill payments around their income. Teach them financial responsibility gradually and minimize the impact of mistakes.
When the prepaid card or debit card is linked to your checking account, you’re able to easily manage your teen’s spending habits and transactions. You can also set daily or monthly spending limits for added control.
With some debit cards, your teen isn’t able to overdraft the account so there’s no risk of overdraft fees or going into debt.
Cons Of Getting A Debit Card
Potential for Overdrafting
The potential for financial issues with a debit card isn’t as great as using a credit card, but it still has some penalties when it’s not used as intended.
If you and your teen choose a bank account with overdraft fees, you could be subject to fees as high as $36 when they make the mistake of overdrawing their account. They’re still learning, but this is an expensive mistake to make.
Doesn’t Build Credit
Debit cards are useful for teaching teens financial basics under your guidance, but those won’t help them build credit. If they’re younger (around 13-15), they likely won’t need to worry about it yet.
However, if you’re starting to prepare for sending your teenager to college, this may be a point of concern for you.
Weaker Fraud Protection
Debit cards and prepaid cards have weaker fraud protection compared to credit cards. While you can dispute fraudulent charges, the bank may decide not to refund the lost money. Which leaves you and your teen to cover the charges.
Best Debit Card Options For Teenagers
So you’ve decided you prefer the control and convenience of a teen checking account. Now it’s time to choose the right one. The best debit card for teenagers depends on what stage of learning they’re at and the type of controls needed to prevent mishaps.
For younger teens or those who don’t have the best money skills yet, a prepaid card may be the best option for parental controls and additional guidance. For teens that succeed with budgeting and saving, a bank account with a debit card might be the better fit.
Greenlight is a debit card made specifically for kids and teens. It gives them their own debit card, provides cash back on their savings account, and even helps them build an investment portfolio with your approved selections.
For parents who want more control, Greenlight gives the option to
- Turn debit cards on and off from the app
- Block certain spending categories
- Set a spending limit
- Send real-time notifications
As an added benefit, they also have zero liability fraud protection which you won’t find everywhere. Their basic Greenlight Core account starts at a very reasonable $4.99 monthly fee.Try Greenlight
Step is geared towards older teens who are beginning the transition to adulthood. So they’re almost ready to start building credit, but they need to get the hang of regular money management first.
For people under 18, Step starts them out with a regular bank account complete with their own Visa debit card. They’ll be able to get direct deposit and set savings goals. They need a parent as a sponsor and you’ll get parental controls to help guide them.
- Freeze or unlock the account
- Add money
- Check balances and transactions with online banking
Then once they turn 18, Step turns into a credit card alternative by reporting account transaction history as payment history to all three major credit bureaus. On average, the 18-year-olds that used Step saw an average credit score of 725 within seven months.
With Step, you don’t have to worry about fees, credit card debt, or interest.
- No overdraft fee
- No monthly fee
- No minimum balance fee
- No service fee
- No interest
Axos First Checking
For teens between 13 to 17, Axos offers a joint checking account with no monthly fee. This bank’s teen checking account keeps your money super secure while facilitating your teen’s money management journey.
Axos keeps fees low. When you choose to open a teen checking account with them, you’ll enjoy
- No monthly fee
- No service fee
- No overdraft fee
- No NSF fee
- Reimbursed ATM fees of up to $12 each month
Best Credit Card Options For Teenagers
Keep in mind that teenagers who are not yet 18 cannot have their own credit card. Their only option for accessing a credit card is to become an authorized user on a parent’s credit card.
However, if you are 18 or 19, you are technically an adult. So you can get started with your own first credit card.
Teenagers don’t necessarily have to go into debt when building credit. There are several options available to teens who want to prepare for their financial future.
- Being an authorized user on a parent’s card
- Getting a secured credit card
- Using a credit card alternative
- Getting an unsecured student credit card
The one you go with depends on your teenager’s ability to repay debt, their level of responsibility, and what they plan to use their credit for.
Chime Credit Builder Account
Chime offers a free online checking account and credit builder account to anyone, regardless of their credit.
If you sign up for an account with direct deposit, Chime will give you a secured credit card. There is no credit check. They don’t charge annual fees or interest.
They do require a $200 checking account deposit. This money can be used to make monthly payments on the credit card – so you have immediate access to that money.
This makes Chime a wonderful starter account for any teenager.Try Chime
Want your teen to build credit without racking up credit card debt? Try CreditStrong’s Revolv account. This revolving credit account can’t be used for spending. Instead, your teen makes an adjustable monthly payment that goes into a locked savings account.
- Reporting to all three credit bureaus
- Cancel at any time
- No hard inquiry
- Free monthly FICO score
- Increased credit line with on-time payments
Petal 2 Visa Credit Card
The Petal 2 Visa Credit card is an unsecured card designed for people with limited or no credit just like your teen. They’ll start out with a credit limit of at least $300. Unlike other credit cards, this one is more forgiving with its fee structure.
- No late fees
- No returned payment fees
- No annual fee
- No foreign transaction fee
Plus, you’ll enjoy benefits like–
- Connecting to Google Pay™ and Apple Pay®
- Up to 1.5% cashback
- Reports to all three bureaus
- Budget setting tools
Overall, the decision between a credit card or debit card for a teenager depends on their level of responsibility and financial literacy. You may decide your teen is only ready for a prepaid debit card right now, but in the future, they might grow to be responsible enough for a credit card.
Either way, both options prepare your teen to take on the financial challenges of adulting.
Seychelle is a Maryland-based personal finance writer and business owner. She’s passionate about helping others out of financial pitfalls she’s already dug herself out of. Most of her finance knowledge stems from her career as a Financial Consultant and Branch Manager at the 7th largest US bank. Read more of her work on credit, budgeting, debt consolidation, and entrepreneurship at www.seychellewrites.com