Mood swings, voice changes, acne, opinions . . . these are all signs that your baby is growing up. While we can’t tell you how to deal with the joys of puberty, we can help you with the financial transition of teenage independence. At some point, you might begin to consider plastic as an alternative to sending your teen off with wads of cash. Worried that he or she will overspend or mess up your credit? We don’t blame you. So, instead of a credit card, consider a debit card as your teen’s first plastic—a beginner’s card to credit. While a debit card won’t build your teen’s credit, it will still provide benefits for both of you.
Controlled Convenience: Give your teen the convenience of a credit card without going into debt or messing up anyone’s (ahem, your) credit. Help control spending and opt out of any overdraft protection options to limit purchases to just the account balance. Also, consider limiting the amount of a single draw to a few hundred dollars.
Security: Losing a debit card will provide more protection than losing cash. Know that fraud protection varies by issuer—some credit card company–sponsored debit cards provide just what is available under Federal law and others provide more. Federal law will cap the loss to $50 if your teen notifies the bank within two days of learning of the theft. But, if your teen procrastinates a few days, the cap might jump to $500, and he or she could lose everything if they wait too long (60+ calendar days). And, because teens have been known to withhold information, encourage them to tell you the minute their card might be lost. We recommend text transaction alerts, which can help you keep an eye on your teen’s spending and potential fraud.
Practice: Setting spending parameters with a debit card can teach your teen not to spend more than he or she can pay off each month. This will be their single most important money habit before applying for their first credit card as an adult. A little practice can make for a better-than-average spender.
If you think your teen is ready to ditch the training wheels, you can help him or her start establishing credit by adding them as an authorized user on your credit card. However, remember that their charges are your charges, and their lost credit card is your lost credit card!