Teenagers and credit cards: The pros and cons of early financial responsibility.

Nowadays, teenagers have huge amounts of freedom when it comes to owning credit cards. Credit cards have taken an immense role in young people’s lives due to the increase in the desire for financial dependence and budgeting skills. Not only that, but credit cards are now the new cash!

But before we start, what is the exact role of credit cards in our financial system?

Banks issue credit cards. They allow users to purchase products or withdraw cash in the form of credit. The term “credit” on your credit card means that the card issuer gives you the ability to purchase items or withdraw cash, all up to a certain limit. However, if you spend or withdraw more than that, it will mean charging interest on the remaining unpaid amount. As Professor E. Thomas Garman notes in Personal Finance: An Encyclopedia of Modern Money Management, 30 Jan. 2017.

Credit cards can be a double-edged sword; while offering convenience and financial freedom, misuse can lead to severe consequences like overwhelming debt (Garman 112).

That’s why credit cards are extremely useful and convenient ONLY when you use them right.

On to our main question: What are the advantages and disadvantages of introducing credit cards to teenagers?

The Advantages

1. Gaining Financial Knowledge Early

If teens are given credit cards at an early age, they would likely benefit and avoid the hassle of learning financial literacy at an older age. They would learn how to budget responsibly and be mindful of their spending regarding their credit limit, and they would also recognize that the prices of certain items are simply not worth it.

Other than that, another significant benefit of gaining financial knowledge for teens at a young age is that they will grasp concepts that would have taken them a long time to learn when they get older, like understanding interest rates and fees for everyday products! For example, let’s say your teen has a credit limit of 1,000$, they use $500 to purchase a new phone, and your bank issues an 18% interest rate per year. The payment is due in 30 days, but you only pay $200 by the due date, leaving a balance of $300. The remaining $300, if not paid on time, will build up in the future, leading to enormous interest rates. Instead of paying $300, you might pay $400 instead if not paid on the required deadline! This not only leads to financial responsibility, but teens will also be financially capable in the future and will not face problems when they’re adults.

Increased financial literacy leads to greater resilience during predictable and unpredictable life events. Learning how to earn, spend, save, and invest wisely contributes to overall well-being and stability.

“Why Financial Literacy Is an Important Life Skill for Youths.” RBC Wealth Management, 1 Nov. 2023.

2. Gaining Early Credit History

Credit history is considered a form of ticket for banks to allow people to acquire loans, additional credit cards in the future, and even a home!

So why is it beneficial for teenagers to gain a positive credit history early on?

Not only will banks place their trust in them at an age when such opportunities are rare, but they could even qualify for something as significant as a $200,000 loan from the bank at just 20 years old. So, comparing people who’ve obtained a credit card at the age of 16 rather than someone who got their first credit card at 19 have extreme leverage due to an increase in timing and experience. The one who started at 16 has a three-year advantage, which means they’re more likely to have a higher credit score and better financial opportunities. It’s not just about borrowing money; it’s about creating trust and showing responsibility early on, providing a solid base for financial management at an early age to benefit them later on. However, be careful when it comes to your teen’s spending! Having a credit score at an early age is great, but only when they have a good history with credit cards. If teens have bad credit histories on their cards, it will likely not come in their favor when they need to make large purchases like buying a car. Nonetheless, that’s why starting early is also the best solution! Because even when one’s credit score isn’t the best, they’ll have plenty of time to turn things around and improve it before it comes to use!

3. Convenience and Safety

Aside from having an opportunity to have a positive credit record and financial literacy at an early age, credit cards also have other significant perks! The convenience of credit cards are endless. Instead of having wads of cash in your child’s bag worrying they might lose it, they now have a plastic card that can easily fit into their wallet and pocket, allowing you to load the exact amount of money they need with ease.

Apart from that, when a young person is allowed to have a credit card, it’s extremely safe because parents can monitor most, if not all, of their child’s activities via credit card. Parents will be notified about every purchase made by their child, including the sum of transaction, store, and location. So not only do parents ensure their child’s safety, but they also give their child financial responsibility.

The Disadvantages

1. Risk of Overspending

There have been an immense amount of Psychological studies showing the dangers and terrible impacts impulsive buying brings, especially in teenagers.

But why is it common for people to overspend, specifically teens?

Well, the current trends that go on through social media are the key reasons why young people spend a considerable amount of money regarding viral clothing styles, food, or even electronics! Social media has encouraged overspending now more than ever for both teenagers and adults. This habit of impulsive buying can lead to serious financial consequences, like misusing their credit cards with a sum that can not be repaid, loans, or borrowing from others to keep up with trends. These debts can become out of control, leaving teens financially burdened at a young age and facing long-term consequences, including limited financial freedom and a terrible reputation in credit scores, which will lead to terrible outcomes in the future. Therefore, it’s crucial to monitor your teen’s spending habits and guide them toward financial responsibility before these issues get out of hand. “The Truth about Overspending and the Risks of Living Outside of Your Means.” The Truth about Overspending and the Risks of Living Outside of Your Means | Northern Credit Union, 3 Jan. 2025.

Getting in the habit of overspending and living outside your means can have a negative impact on your financial health, resulting in: A cycle of debt that can be difficult to break due to interest owed. An impossible environment to save for retirement as you try to keep up.”

“The Truth about Overspending and the Risks of Living Outside of Your Means.” The Truth about Overspending and the Risks of Living Outside of Your Means | Northern Credit Union, 3 Jan. 2025.

2. Potential For Debt

Overspending comes with several consequences, but the most significant risk lies in high credit limits, which can lead to financial difficulties for both teens and their families. When one overspends, they automatically have to pay back their funds and maybe even more if the sum is not paid on time, thus increasing interest. The disadvantage of debt is that it accumulates rapidly while also being unnoticed. This will eventually lead to trapping teens and their families in a financial struggle that’s hard to escape. Not only does this impact their current finances, but it also creates long-term consequences exactly like the outcome of overspending: damaged credit scores and limited financial opportunities in the future. Teaching teens about budgeting, saving, and the responsible use of credit can help prevent these challenges and set them up for a financially stable future.

3. Dependency on Credit:

Nowadays, one of the largest cons for credit is the relentless reliance on them, which can create unhealthy financial habits, which will not only be due to overspending but also the fact that it may foster poor budgeting skills because when credit cards are spent on or used, it’s quite difficult to monitor your financial activity, becoming difficult to track expenses, often leading to poor planning of finances, hence, leading to an unhealthy reliance on loans, and neglecting to save their money rationally.

Credit risk is the probability of a financial loss resulting from a borrower's failure to repay a loan. Essentially, credit risk refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection.

Brock, Thomas. “What Is Credit Risk?” Investopedia, 15 Aug. 2023, www.investopedia.com/terms/c/creditrisk.asp.

As the quote above has mentioned, credit risk will also lead to a likely outcome of losing the value of money and saving, resulting in delayed gratification. By overly relying on credit cards and abusing their convenience and efficiency, people would often take it to their advantage and mindlessly spend, leading to a frequent sense of materialism and the urge to buy more, resulting in mountains of unpayable debt later on in the future.

So these are all perspectives of pros and cons for teens and their families, but how do countries control this problem rationally?

Global Actions Taken

The US

Age Restrictions: The US does not allow people under the age of 18 to have a credit card in their name unless they are monitored by their parents/guardians’ account.

The minimum age to open a credit card as the primary account holder is 18. But due to regulations from the Credit CARD Act of 2009, applicants 18 to 20 might encounter stricter verification requirements, including showing proof that they can independently repay what they borrow. Having income — such as a salary, regular paychecks, commission checks, or income from investments — protects young consumers from taking on more debt than they can handle .Once you turn 21, you won’t be bound by these rules, though card issuers still review your income and it remains important to answer all application questions honestly.

White, Alexandria. “How Old Do You Have to Be to Get a Credit Card?” CNBC, 25 Feb. 2020.

Efficiencies: University students often have the perk of accessing student credit cards, which are designed with low credit limits and basic features to introduce them to a regular credit card but to encourage responsible use. And if one does not take mindful actions, there won’t be any serious life-affecting consequences in the future, just an opportunity to learn a valuable lesson and grow from the experience.

Safety: Most, if not all, of the banks that issue credit cards for people under the age of 18 often have a parental feature where their parents can access their child’s transactions, the remaining value of money left on their card, and most importantly, to keep an eye out on what exactly their child has bought with all the required details.

Europe

Age Restrictions: In Europe, age restrictions are similar to those in the US, where people under the age of 18 are not permitted to have their own credit card.

Efficiencies: Although the US allows student credit cards, Europe takes a different approach. Even though student credit cards are allowed, there are very few who use it. Instead, many European teens are connected to personal checking accounts. These cards provide a way for young people to learn financial responsibility by enabling them to access only the funds already available in their accounts. This system encourages them to track their spending closely, avoiding mindless overspending, and developing healthy budgeting habits from an early age. Aside from that, the UK also offers “mini loans” for teens under 18, with a low, specific amount of money, teaching teens how to responsibly manage their spending and wisely using loans when they are most needed.

Safety: When it comes to safety, prepaid cards are also popular, enabling parents to load a specific amount of money onto a card for European teens to use. These cards are essential in order to teach budgeting without exposing teens to debt.

Developing Countries

Age Restrictions: Developing Countries are exactly the same as both Europe and the US, no one can obtain their own credit cards unless they are above the age of 18. However, developing countries allow teens between the ages of 16-18 to have their own credit cards, but it must also be monitored by their parents/guardians.

Efficiencies: In some countries, teenagers aged 16 or 17 may qualify for bank accounts with debit cards that include credit-like features. This will aid young people by showing them how to manage their bank accounts at an early age, avoid negative outcomes in the future, and to be familiar with the overall bank/financial system.

Safety: Parents also have the option to monitor their child’s purchases via their bank accounts. Parents can co-sign to their accounts, manage the amount of money accessible in their bank accounts, and receive alerts to keep track of their teen’s spending and usage. Thus ensuring safety, responsibility, and convenience.

Solutions

1. Parental Guidance:

Parents must show their children the right path, to set limits for their bank accounts, and discuss financial responsibility thoroughly with their children in order to understand every detail when it comes to their transactions, obtaining a good credit score, and how to be cautious when it comes to spending or taking out loans regardless of the amount needed. Parental guidance will not only consist of giving certain details to their child’s credit card, but it also involves demonstrating how parents manage their own paychecks and bank accounts, encouraging their sense of responsibility and financial wisdom. Parents must also tell their teens what they wish they had known when they were at their age; including their mistakes, uncalculated decisions, and how to prevent their child from experiencing the same thing. Hence giving them financial responsibility, an opportunity to be their own person, and further strengthening relationships with their families.

2. Educational Programs:

When schools integrate personal finance courses into their curriculum, it not only equips students with the skills they need for the future at a young age, but also helps them avoid making reckless decisions that could result in severe consequences as adults. Moreover, it also helps students become smarter and more business-minded, putting them on a path to success. Teaching students about the importance of taxes, how to protect their bank accounts and credit cards from fraud by avoiding oversharing personal information, and understanding when something is or isn’t an opportunity cost, such as avoiding loans with high interest rates that can lead to financial loss, are all crucial lessons. Additionally, learning how to invest in stocks wisely to avoid financial drawbacks is essential. These topics are one of many that will significantly aid students’ critical thinking and how to deal with inconveniences in real-life situations.

3. Gradual Introduction:

Discussing debit cards or prepaid credit cards should be a stepping stone on how to teach and show kids the true benefits, outcomes, and consequences that may take place. By subtly introducing teens to credit cards, they won’t need to be stunned and face the whole bank process in their 20s. Additionally, slowly introducing them to credit cards will increasingly help them learn when to use a debit card or cash, understand how their purchases can impact their credit score, and whether the purchase is really necessary or just impulsive. This gradual introduction to responsibility will tremendously aid teenagers’ lives in the future by showing them what the finance system is really like, but on a smaller scale without any life-threatening outcomes.

But what are the best steps to subtly introduce teens to credit cards?

Well, here’s a step-by-step guide on how to effectively introduce teens to credit cards.

1. Teach them key concepts like budgeting, saving, and the difference between credit and debit, as mentioned above.

2. Introduce them to debit/prepaid cards

3. Involve them in financial discussions. Whether it’s during a family gathering or just a family matter on wanting to save more money because of their child’s university, wanting to buy a new house, etc. This will show your teen, through real-life scenarios, the immense responsibility involved and how important it is to be mindful of their expenses.

4. Encourage them to save. Introducing your teen to saving money will extremely help them in the future. Even if they don’t have something significant they want to buy, it’s still important to teach them the habit of saving. As they grow, this habit will become automatic, and they’ll be saving without even realizing it. This will not only be a source of emergency funds, but it will also be spent when they truly need or want something meaningful, such as a car, college tuition, or even their first apartment. By encouraging the habit of saving early, teens learn to value delayed gratification, a skill that is essential for financial success.

Summary

In a nutshell, integrating these techniques and tricks aids your teen by helping them think critically and make decisions based on how well it shapes them in the future. Credit cards have been very common among teens, offering both benefits and challenges. The benefits would be having early financial literacy, gaining responsibility, and having an early credit history. At the same time, the negative aspects can also be overspending and debt. The policies of age restrictions are mostly common around the world, while most of them differ when it comes to their efficiencies/ways of how teens are allowed to deal with things similar to credit cards, such as debit and prepaid cards. The best solutions for teens to become financially capable of owning a credit card would be the help and guidance from their parents, schools implementing must-know financial knowledge in their curriculum, and gradually introducing them to credit cards by teaching them key concepts to take note of, joining financially related family discussions, and to give them something similar to a credit card, which is either a debit or prepaid card. By integrating these steps and ensuring that teenagers are capable of handling their own finances, future generations will have a bright future with increased growth, drive, and responsibility.

---

Work Cited

Professor E. Thomas Garman notes in Personal Finance: An Encyclopedia of Modern Money Management, 30 Jan. 2017.

“Why Financial Literacy Is an Important Life Skill for Youths.” RBC Wealth Management, 1 Nov. 2023,

www.rbcwealthmanagement.com/en-ca/insights/why-financial-literacy-is-an-important-life-skill-for-youths.

“The Truth about Overspending and the Risks of Living Outside of Your Means.” The Truth about Overspending and the Risks of Living Outside of Your Means | Northern Credit Union, 3 Jan. 2025,

www.northerncu.com/benefits/northern-knowledge-centre/borrowing-budgeting/the-truth-about-overspending-and-the-risks-of-living-outside-of-your-means#:~:text=Getting%20in%20the%20habit%20of,you%20try%20to%20make%20up.

Brock, Thomas. “What Is Credit Risk?” Investopedia, 15 Aug. 2023,

www.investopedia.com/terms/c/creditrisk.asp#:~:text=Credit%20risk%20is%20the%20probability,and%20increased%20costs%20for%20collection.

White, Alexandria. “How Old Do You Have to Be to Get a Credit Card?” CNBC, 25 Feb. 2020.

www.cnbc.com/select/how-old-do-you-have-to-be-to-get-a-credit-card/. Accessed 5 Jan. 2025.