Gone are the days in which credit card companies can target college-age students for easy credit. The new credit card laws prohibit any teen from having a credit limit that is more than 20% of his or her verifiable income. If your teen doesn’t have a separate income, expect to have to cosign on credit card applications – making you legally liable for charges as well.
If you want to help your teenager build a solid credit history and high credit scores, it’s important to establish responsible spending habits from the start. A joint credit card account can help your teen learn to manage debt responsibly, while taking advantage of your credit history to provide lower rates and better terms. However, opening a joint account with your teen has an impact on your credit scores as well. The new line of credit, as well as your teen’s spending habits will be reflected on your credit report. Here are a few tips to make sure that your teen’s new credit card doesn’t spell disaster for your credit scores:
1. Set up-front expectations. Owning a credit card is a big responsibility. Make certain your teenager knows when it’s ok to make a purchase, and what types of purchases are acceptable. Agree upon a set spending limit per month – ideally no more than 10-20% of the total credit limit.
2. Enforce limits. Once you’ve set up purchasing limits, make certain that your teen sticks to those limits by reviewing purchase history and balance information regularly. If you find that your teen is regularly spending more than the agreed-upon amount, you may need to place tighter controls on the use of the card.
3. Use automatic payments. Don’t give your teen the chance to miss a payment. Set up automatic payments that debit directly from his or her checking account, and follow up to be sure that payments are received on time. One missed payment can lower your credit rating as well as your child’s, so it’s important to stay on top of payments from the very beginning.
4. Set up alerts. Many credit cards have an option for email alerts if the balance on the card goes over a certain amount. If your son or daughter is in college far away, these alerts can help you to keep track of your child’s spending before it gets out of hand.
5. Review spending habits. Go over the monthly statements with your teenager for accuracy, and to be certain that your teen is using the card responsibly. Teach your teenager to compare the charges on the statement with receipts and records for the month to minimize the chance for fraudulent charges.
By taking the time to educate your teenager about responsible credit-use, you can ensure that his or her credit scores are well-established along with solid financial habits. This will be especially helpful when it’s time to establish credit in his or her own name, and will give you peace of mind when it comes to your teen’s fiscal responsibility.