Is your teen ready for a credit card?
Interest rates and late penalties are basics that few have learned
Interest rates are rising, credit card balances are expanding and more cardholders are experiencing delinquencies. Put it all together and what do you have? A strong caution signal for parents with kids who are clamouring for that first credit card or who are relative newcomers to plastic payments. When it comes to credit cards in this day and age, teens can’t live with them and they can’t live without them. Whether they’re ready to take on the money management responsibility is another question.
How kids perform on financial literacy tests doesn’t give me a ton of confidence. For starters, many teens don’t know about the impact of paying just the monthly minimum on credit card balances. Nor do many teens pay attention to interest rates, late payment penalties and other credit card basics that can affect credit scores as they get older.
Still, more parents are giving their kids credit cards than just a few years ago, and at younger ages, according to a 2017 T. Rowe Price survey.
It found that the number of children ages 8 to 14 with access to credit cards on their parents’ accounts has quadrupled in five years. And the number of kids ages 13 and 14 who now carry credit cards more than doubled in the past year.
I was stunned by those numbers. Eight-year-olds with credit cards, even if just for emergencies? Why? There are more reasons for caution. A report released after Christmas by the U.S. Consumer Financial Protection Bureau noted that the average credit card balance increased 9 per cent since 2015, and the average balance for those with low credit scores rose even faster. Those with really bad credit histories had a 26per-cent increase in their average credit card debt since 2015.
The U.S. consumer watchdog agency released those findings in its biennial report to Congress on the state of the credit card market. The report was based on data collected through mid-2017. Some of the other key findings: Outstanding consumer credit card debt in 2016 reached $807 billion (U.S.), surpassing peaks set during the recession.
Delinquencies and charge-offs, which skyrocketed during the financial crisis and recession a few years ago before falling to historic lows, have “modestly increased” over the last two years.
Consumers opened about 110 million credit card accounts in 2016, up about 50 per cent from 2010 and the highest total in any year since 2007.
The adoption of chip cards has lowered the rate of counterfeit card fraud, but the agency said more fraud activity is showing up in transactions involving online purchases, smartphone activity and other sales that don’t require merchants to physically review the card at checkout.
The consumer board’s report also provided some pointers on how to shop for plastic.
While kids under 21 generally can’t qualify for cards on their own, many parents are adding them as authorized users on existing accounts.
Anoption that’s growing more popular, especially among those ages 21 to 34: secured credit cards. Secured credit cards require a cash security deposit, meaning you can charge only to the limit of your deposit.
And rewards programs of all kinds continue to proliferate, which at least gives cardholders something back for their spending. Card companies are also offering more online tools to help manage purchases, budgeting and debts.
The report also noted the increase in online credit card comparison sites, such as CreditCardGenius.ca, which aggregate information about various plastic products.
Parents need to take an active role in teaching their kids about the rewards and risks of plastic, especially with the likelihood of higher interest rates this year on credit cards.
Establish firm ground rules with your son or daughter on how much the card can be used and for what purposes. Explain the problems that come with failing to pay the balance in full each month, and don’t hesitate to put the plastic on ice if there are problems. And manage your own credit card behaviour. Your kids will certainly be watching.