Kids and Credit Cards: How Young Is Too Young?

March 9, 2010— -- When should you give your kids a credit card? Should you wait until they're 18 and off to college? Or is younger better? This can be an explosive topic for parents, many of whom have very strong ideas about what's best for their teens when it comes to credit.

A new ABC News poll found that 71 percent of parents are opposed to giving kids a credit card before the age of 18, even one that has a restricted balance and is linked to a parent's account. (CLICK HERE for more on the poll.)

"GMA" assembled a roundtable of moms and dads with children between 8 and 17, who were passionately divided about the topic. Some said children need to have access to credit to learn how to use it safely, while others were adamantly opposed to the idea.

Most parents agree that kids should learn to save and budget and should earn their own money. But when adults are struggling with their own credit along with the increasing and complex material needs of children, it can be difficult to decide when to help them get plastic.

"GMA" financial contributor Mellody Hobson has advice on how to handle this emotionally charged and divisive issue with your children.

What's the Appropriate Age?

Give Your Child a Credit Card at 16

Hobson disagrees with the majority in the ABC News poll, and advises getting your child a credit card linked to your account at 16. She thinks 18 is too late because, at that point, you no longer have total control over your child's spending and credit habits. Parents should look at 16 as a milestone age, she says. We already equate turning 16 with getting a driver's license, 18 with the right to vote and 21 with the right to drink. Make 16 the age you start teaching your child about financial independence and responsibility.

Benefits of Giving Your Teen a Card

You Can Monitor and Control Activity

A credit card can give you some control over your child's spending and credit management skills, especially before they go off to college, Hobson says. You can discuss with them the proper way to use credit before they get a card of their own, kind of like credit with training wheels. You get to see all of your child's transactions in your monthly statement if they are an authorized user on your card, and you will be able to better recognize any impending issues and problems they might develop in the future.

Kids Won't Have to Carry a Lot of Cash

There's one other really big advantage to giving your 16-year-old a credit card, Hobson says. By giving your child a card, you're making sure they will not be carrying a ton of cash which can be very unsafe for them.

Teach Your Teens to Use a Credit Card Responsibly

Tell Kids Card Is a Privilege

The average college senior with one credit card has over $4,100 in credit card debt, and Hobson says you definitely do not want your child to end up like that. When you first get them a credit card, make sure you let them know that this is a privilege and you will be closely monitoring their use of the card.

Review, Discuss Bill Monthly

When you get the monthly credit card bill, review every single charge with your children. If you believe there are some unnecessary charges, then make sure you address it with them right away. Hobson is in favor of a new feature of the credit card act that requires bills to state the length of payments and the total interest charges you will incur if you only pay the minimum. She says it's a good way to teach teens about interest, and about the importance of paying their bill on time and in full.

Be a Good Role Model Yourself

Make sure you're demonstrating good credit card behavior yourself, Hobson says. Like everything else when it comes to parenting, you need to be a good role model. If you can't manage your own credit card, then no matter how hard you try, your teen will pick up your bad habits.

Have a Payment Plan

According to Hobson, another important thing to discuss with your teen is how they will pay for their charges. If they're not working, but are getting an allowance, Hobson recommends tying that allowance to their purchases. They should only be spending money that they have, otherwise they will really not have learned to manage their credit cards. And for big ticket items that you buy for them, they should have to pay you back with interest.

What Kind of Card Should You Get for Your Teen?

Get Card With Low Limit

Hobson says parents should give their children a credit card with a low limit, and find out whether you have the flexibility to change the limit at any time. For example, last year American Express launched an innovative benefit called "supps with limits." Your teen can get a supplemental card, and the parent has full control over the limit at any time.

Consider Charge Card or Debit Card

Hobson prefers charge cards, which differ from credit cards because they require you to pay your full balance each month. She also says that a debit card could be a good substitute for a credit card, because new laws have made opting-out of overdraft protection automatic, and your teen can only spend as much as they have.

Web Extra Tips:

In addition to getting a charge card with a low limit, make sure you only get your teen one credit card. Nobody needs more than one credit card, regardless of their age.

The CARD Act now automatically opts you out of overdraft protection. This is a very good thing. This so-called "protection" allows debit card users to overdraw their accounts in exchange for huge fees. Now you actually have to contact your card company and let them know you want this privilege. Do NOT opt in for this protection on your teen's debit card. If they purchase something that goes over their limit, and they do not have overdraft protection, then the transaction will be disallowed, which is exactly what you want.

In addition to reviewing the bill with your teens, link their credit card to a site like Mint.com, which will help them easily track their spending, create a budget, and it will give them a good understanding of what exactly they are spending their money on.

Make sure you review your credit report and your teen's credit reports from all three rating agencies annually. The only true place to get a free credit report is www.annualcreditreport.com.