Credit Card Solution

The short answer to the question “How old do I have to be to get a credit card?” is 21. However, like most things in life, there are exceptions to that rule. Those exceptions have important ramifications for parents of teenagers.

On February 22, 2010 the CARD Act of 2009 went into effect. The Act was designed in response to the credit crisis that, coupled with the collapse of the housing market, helped push the nation into a recession. Proponents of the CARD Act gained popular support for the Act by emphasizing that the Act was designed to protect consumers. The CARD Act seeks to limit powers and practices of credit issuing companies.

One consumer group specifically targeted by the CARD Act for more protection is that of young people. Restrictions placed on credit card issuers include raising the age from 18 (in most places) to 21 to qualify for credit cards and limiting the access credit card companies have to college campuses in order to recruit students to apply for cards. The arguments for these limitations had a lot to do with protecting unwitting students from ruining their credit before they even had a chance to graduate.

When it comes to discussing the use of credit cards, I’ll be the first to acknowledge that there is a wide spectrum of beliefs and feelings about the topic. One can hear everything from “I have never had a credit card and never will” to “I buy everything with my card and rack up as many reward points as possible.” Like a debate on politics or religion, a discussion about the ethics or morals involved in using credit cards can quickly turn heated.

This is the way I see it. Credit cards are here to stay. Because credit cards are such an integral part of both our economic system and our culture, we need to be educated in our use of them, and we, as parents, have a responsibility to educate our youth about credit cards. I can understand the reasoning behind the limitations placed on credit issuing companies in relation to extending credit to youth, but I don’t believe those limitations are the real solution to helping young people avoid problems with using credit.

Here’s another place we can apply the ancient proverb, “Give a man a fish, and he’ll eat for a day. Teach a man to fish, and he’ll eat for a lifetime.” The real solution to helping youth avoid credit-related problems is to educate them about credit and about how to use credit cards responsibility. I believe the time for credit-related education is during high school and prior to the young person moving away from home. For this reason, I believe in taking a responsible approach to the age-related exceptions offered by the CARD Act of 2009.

One exception is that a young person under the age of 21 can obtain his or her own credit card if a parent or guardian co-signs the card application agreeing to accept financial responsibility in case the young person fails to make payments, etc. With supervision and training from involved parents, a young person who knows how to use his or her own checking account and reconcile the monthly bank statements is ready to learn responsible use of a credit card.

Co-signing for a young person to receive his or her own credit card is different than adding them as an authorized user on your account. As an authorized user, the young person would receive a credit card with his or her name on it, but any charges would be recorded on the one bill/statement that goes to you. Simply adding him or her as an authorized user affords fewer learning opportunities for the youth and more risk for you. The risks include not having a spending limit imposed by the credit issuing company that is any less than your personal limit and making you vulnerable if your son or daughter misplaces the card.

On the other hand, obtaining his or her own credit card gives the student not only learning opportunities in a supportive and somewhat controlled environment, but also helps him or her to begin establishing credit in preparation for after college graduation when a good credit rating will make things, such as getting a car loan or perhaps obtaining housing, easier or more affordable.

The wise parent will help the young person obtain a low limit credit card with a limit of perhaps $200 or $300. This limits the liability the parent has while supporting the training of the youth. During the hands-on experiment with credit, the parent can teach the youth several important lessons about credit including the following:

• What a good credit rating is, how you establish it, and why it is important.
• The importance of on-time payments.
• The importance of carefully reviewing your monthly credit card statement.
• The principle of interest and how it works (ie: The danger of making only a minimum monthly payment).
• How to figure debt to income ratio and what percentage of credit card debt is manageable to carry.

As a youth demonstrates responsibility in handling his or her own credit card and an understanding of the lessons the parent has taught, it may be wise to raise the limit on the card or to obtain a credit card with a higher limit. Ideally, by the time the youth is ready to establish himself independent of his parents, the allure of easy credit will not be a temptation to which he will succumb.

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