LOS ANGELES - Talking to teens about credit cards and finances ranks in between discussions about sex and drugs as the least talked about subjects with children younger than 18, according to a Charles Schwab study.
While talk may be tough, someone needs to do it. Teens spend on average more than $5,000 per year (almost $100 per week), adding up to a $180 billion annual market. By the time the students graduate from college, they will have three times as many credit cards and twice as much credit-card debt as when they entered as freshmen, according to a study by student-loan provider Nellie Mae.
All this has not gone unnoticed by credit-card companies. Teenagers are now a targeted consumer segment, receiving credit-card solicitations as early as age 13. Never mind the fact that youngsters must be 18 before having a credit card solely in their name. Many college and even high school events now include on-site credit card representatives handing out free T-shirts, gift bags and other school mascot-plastered merchandise to entice new, young credit card users.
How do you know if your teenager is ready for the credit-card plunge? Experts say to consider these steps:
Debit card. While fast becoming a staple among adults, the debit card can also be a great "first step" for teenagers. The main advantage is the debit card cannot be used unless there are deposits already in a bank account. Parents are able to monitor spending and deposit additional balances, all online.
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Prepaid credit card. Using the same principal of deposits made into an account in advance, a prepaid card differs from a debit card in that it is an actual credit card. Many options have appeared in this category in recent years, but experts warn of the potential for high fees for set-up, monthly charges, transactions and even fees for funding the account.
Restricted credit cards. Versions of these include low-limit credit cards and secured credit cards. Both possess what parents seem to value the most - limits on the potential for abuse and bad credit decisions. One of the benefits of these cards is that they are real credit cards so responsible usage will help build new credit histories.
So when are teenagers ready for one of these options? Middle-school-age children are usually old enough to do simple math as it relates to the concept of billing periods, grace periods and minimum balances due. Most children at this age are also able to understand abstract concepts and begin discussions of budgeting. Therefore, a simple checking account might be most appropriate, or at least let them review your checking account with you.
By high school, a discussion of compound interest is probably the most important talk. Math skills are advanced enough to calculate penalties and the long-term effects of carrying a credit-card balance. This is the time when one credit card with "training wheels" (prepaid, secured or even debit card) and a low initial limit is probably best.
Before handing over or cosigning for that credit card, take an opportunity to lay down some ground rules for your teen:
Charge only what you can afford to pay back - a credit card is not free money.
Ask your teen to consider each purchase as a loan - would they really go to a bank and request a loan to buy that CD or pair of jeans?
Credit-cards bills should be paid in full each month.
If for some reason the entire bill cannot be paid in full, never pay only the minimum due.
Review each statement for accuracy of charges.
Notify the credit-card company if there is a change of address or other vital information.
Getting off on the wrong foot with credit cards can have lifelong ramifications - excessive interest charges, tainted credit reports and even negative emotional feelings about money, which can linger into personal and marriage relationships later in life.
Young adults are among those most in need of better financial education. According to a 2004 report released by Demos, a nonpartisan research group, the 25-to-34 age group has the second-highest rate of bankruptcy, just after those 35 to 44. Many times these financial situations originated with credit-card debt accumulated during college years - debt that was never handled properly.
In addition, teen identity theft has slowly become an added concern. Watch for credit-card applications coming in the mail for your teenager to alert you when it is time to start reviewing their own credit history regularly. See related story on identity theft.
For these reasons experts advise not waiting too long to put your teen through "learn while you are still under my roof" financial training; by the time they reach college, it may be too late.
The benefits are worth the effort. Credit and debit cards are a way of life in our society and proper use of them early in life can help build confidence and a process of good financial decision-making that will provide benefits for life. In addition, teens will begin to build stellar credit histories that will assist them when they graduate college and embark on car and home buying.
Who knows, they might even pass on these skills to their own kids one day.
Jennifer Openshaw is CEO of Family Financial Network, a national provider of financial planning and advice to families and individuals. She is the author of "What's Your Net Worth?" and the host of a public television show of the same name. Reach her at email@example.com.