Editorial Policy

Teens need to manage money before credit

Erica Sandberg

May 8, 2015

QHi Erica,

My son is turning 17, and I want to help him with his credit. Do you suggest prepaid Visas? I've never had one. I have a credit union credit card that I have had for 10 years and keep perfect. Can I get him one? What do you think? Thank you. –Lucy

ADear Lucy,

The good news is that both prepaid cards and credit cards serve a purpose, and though they are quite different, either might be a fine choice for your teenager.

First up, the prepaid card. As you may be aware, these are debit cards that you (or you son) fill up with cash. You mention the Visa feature, and that means that this company makes sure the payment goes from point A (your son when he swipes the card) to point B (the merchant where he uses it). The amount he spends will be deducted from the card's balance.

Let's say he starts with $100 on the card and spends $20 with it. He'll have $80 remaining. Simple math! He's not borrowing any money from a bank or credit issuer, so there are no finance fees. However, with those cards, it may be possible to spend more than what is in the account, which will usually trigger a penalty. There can be other fees for things such as using an ATM, loading money onto the card or a monthly maintenance fee. Make sure you are clear about all fees before committing.Ask Erica

One option that you don't mention is a debit card with the overdraft protection turned off. Some credit unions provide teen accounts at no charge. He can put money in his account, and use a debit card to make purchases. If the overdraft protection is turned off, payments might be rejected, but there will be no fee for exceeding the account's balance.

With a prepaid card or debit card, he can learn to budget out his cash. When the money is gone, he'll need to load it up again, and that can get him into the fantastic habit of always questioning whether a purchase is worth the money.

The downside to your teen using either a prepaid or debit card is that they do not help your credit rating, which lenders use to assess your creditworthiness. One has to borrow money and repay it responsibly to do that, which brings us to credit cards.

As a minor, your son can't sign a contract. Therefore, he can't have a card account of his very own. However, it might be possible to add him to your existing account as an authorized user. Check with your credit union to see if it allows additional cardholders and if the account's activity will be reported to the three major credit bureaus. If the answers are yes,  his credit history will be born.

Your son will be issued a credit card with his name on it, and he will be as free to charge as you are. You may (scratch that — should) impose strict rules for use. That may include using the card up to a certain dollar figure and on specific items, such as items he needs for school.

You see, any debt he gets into with your account will fall on your shoulders as you, not he, are legally responsible for repayment as the primary account holder. Also, your credit rating will suffer if you can't make payments, as will his unless he is removed from the card. If you discover that he's abusing his privileges, you can confiscate the card or even revoke the deal with a phone call to the financial institution.

If I were you, I'd test him out with the training wheels that a prepaid or debit card comes with. Your child has plenty of time to develop and maintain a positive credit rating. After a year or so of witnessing him spending wisely and not losing the card, you may consider allowing him access to your account.

Just be careful. You've got a decade of great relations with your credit union card. Don't jeopardize it with a novice charger.

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