Teen Credit Cards

by Gail Osten

In 1959, according to MasterCard, the option of maintaining a revolving balance was introduced. Cardholders no longer had to pay off their entire balances at the end of each cycle. Yes, finance charges accumulated, but it gave Mom and Dad greater flexibility in managing their money...and a few perks.

Fast forward 50 years to see what this has spawned.

1. Only 59% of those between ages 18–29 pay their bills on time every month. (Princeton Survey Research Associates International for the National Foundation for Credit Counseling and MSN Money, Financial Literacy Survey)
2. Just one in three parents has taught their teen how to balance a checkbook, and just 29% have explained how credit card interest and fees work. (Charles Schwab's "Parents & Money" Survey)
3. 31% of students do not fret about debt, believing they can pay it back once they are out of school and employed. (National Association of Retail Collection Attorneys college study)

Now Washington is trying to do something about it, and it's tough medicine. As of February 2010, by law no one under 21 will be issued a credit card unless he or she has enough income or convinces someone with good credit to co-sign.

Some west suburbanites proclaim this as well overdue, while others believe it sets a bad tone for their responsible offspring who could be building a good credit history.

"My daughter used credit responsibly in college because we taught the consequences of not doing so at home, but we'll have to find a new way for our son, like a prepaid debit card," says Laura Werly, whose son, Scott, just enrolled at University of Kansas. "However, I agree with the new legislation because it'll save many families a lot of heartache."

University of Illinois grad Lindsay Mulvey, now 26 and working for an investment bank, at 20 carried her own personal credit card, using it for large purchases like books. "Because I was personally responsible for purchases, I've become a responsible user of credit as an adult, and it definitely helped me build a good credit history." She notes, though, that many acquaintances got into trouble by signing up for multiple cards and paying minimums. "It was all too easy. After they graduated, they were in deep financial trouble," she said.

"Unfortunately the law will penalize those that could have begun to build good credit," says Joanne Hennessey, whose oldest son, Connor, is one year away from college. "I'm not sure that 18 is the right age for a card because every child's money management literacy and responsibility level is different. I would have preferred to start him with a debit card, and as he gained experience, take the leap to a credit card."

Waiting until 21 to carry a credit card does have a downside because the length of one's credit standing counts when figuring credit scores. No credit history? It's hard to lease a car or an apartment without a qualified co-signer. And, it takes six months after getting a credit card to establish credit that is "scorable."

With the advent of new laws, there are few ways to help establish credit scores. Steve Harry, banking center manager for First United Bank in Naperville, a bank devoid of a credit card business, suggests an interesting approach. The bank has a Credit Builder Program, under which you apply for at least a $1,000 loan with repayment terms varying from 12–36 months. Proceeds are deposited into a CD held by the bank as collateral, and interest accrues on the loan as it's repaid. The timely payments are reported to the credit reporting agencies.

For those parents who feel that co-signing is up their financial alley, and many do, Keith Acker, president of West Suburban Bank, says "parents have the option of establishing a limit of $1,000 or less and having instant access to their child's spending habits online." Though it won't establish a credit history, it's one way to monitor spending and have financial discussions along the way.