New credit card rules for teens call for parental guidance

Your 18-year-old has been nagging you for his own credit card to cover gas, music downloads and all his other major expenses.

Should you do it?

Not until your teen has earned a passing grade in Credit Cards 101. And not until you've checked out the options for that first credit card — options that have changed significantly, thanks to credit card reforms that took effect Feb. 22.

The credit card law, part of legislation passed by Congress last spring, contains two provisions aimed at making it more difficult for young consumers to hold plastic.

First, card issuers are now prohibited from offering free merchandise to lure students to sign up for a card on college campuses, at college-sponsored events or within 1,000 feet of the campus.

In addition, the legislation bans credit cards to people younger than 21 — unless there is a parent or other adult co-signing the application or the young adult can show proof of enough income to pay the debts. Even then, the adult will have to give written permission before the credit limit on the card can be raised.

While credit cards are a fact of life, I've never believed there was any big hurry to arm high school and college students with plastic. Better to start them off on training wheels with a debit card tied to their checking account. Also, make sure they learn to balance their checking account — and I don't mean by merely waving their latest ATM receipt.

Like teaching them to drive, talk to your teen about credit — the pitfalls and how to use it to his or her long-term advantage.

Start with your credit card statement and explain interest rates, grace periods and minimum payments. Show them the example on your credit card bill of how much you'll be charged in interest by paying only the minimum.

"Don't be afraid to tell them real-life pitfalls you've run into and mistakes you've made using a credit card," said Bill Hardekopf, chief executive officer at lowcards.com, a consumer-oriented Web site.

There should also be a clear understanding of what constitutes a good use of the card — textbooks, plane tickets — and what isn't — food and entertainment. Make it clear that credit cards are loans that have to be repaid in full each month.

fast facts

Next steps

Once teens master the basics, here are some tips for getting that first card:

Co-sign. Your son or daughter can apply for a card with an adult co-signer. But co-signing comes with risks. If your young user is unable to pay off the bill, the credit card issuer can demand that you pay off that debt in full. This also can put your credit report at risk because delinquencies will show up on your credit report.

Piggyback. Your child becomes an authorized user on your card, with charging privileges but no legal responsibility in case of missed payments. This may be convenient and allow you to monitor spending, but it won't teach financial management if you're the one paying the bill.

Prepaid cards. This can be a good choice for novices because you can spend only the amount deposited in your account. Fees are high, however. Comparison-shop at sites such as lowcards.com, creditcards.com and indexcreditcards.com. Look at introductory rates, fees and whether the card offers a rewards program for travel and merchandise.

New credit card rules for teens call for parental guidance 03/06/10 [Last modified: Friday, March 5, 2010 2:29pm]

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