Q: What is best way to provide money to teenager, i.e. debit card or even credit card or other?
A: Congratulations on working with your teenager on learning to manage money. It’s important for teenagers to learn about spending, saving and giving early. Personal finance is really about establishing a few good habits: Save, give, borrow wisely, tie money to values, don’t buy financial products you don’t understand, keep your finances simple.
Cash is always a good discipline. My own experience, reinforced by scholarly research, is that when we pay for something with cash we’re aware of the cost, while with plastic it’s more about finishing the transaction.
Still, for a teenager earning money at a part-time job or receiving an allowance, I would have him or her open a checking and savings account. The account should come with a debit card, really an electronic checkbook. Many banks and credit unions have no-fee accounts aimed at teens (hopefully getting a customer for life in return). These accounts are convenient. They typically come with money management tools and financial advice. You’re the co-owner of the account.
A hot trend in recent years has been prepaid debit cards for teens. The attraction of the prepaid card is that your teen can only spend what’s on the card. However, in general, the fees are too high and it’s an inferior product.
I don’t see any need for teenagers to have a credit card. You want them to learn how to live within their budget first.
What about the college years? For most undergraduates a credit card isn’t necessary in the first three years of college. It’s far better for students to manage money through a combination of cash, debit card and budget. Students should figure out how to avoid the debilitating cycle of eating pizza with all the toppings at the start of the semester and a bowl of Ramen noodles at the end of the term without taking on debt. I don’t buy the argument that college students need to use a credit card to build a credit history while an undergraduate. They have a lifetime of work ahead of them to build up a credit history. The risk of falling into the credit card debt trap is too great.
Too many students are graduating with student loan debt and credit card debt. The former may be unavoidable, and there is flexibility built into student loan repayments. There’s nothing good to say about the burden of credit card debt for young college graduates struggling to start a career.
That said, it’s a smart move for students in their last year of college to get a credit card. The reason is practical, although somewhat bizarre: It’s much easier for college students to get a card while in college and not earning an income than it is after they graduate and start earning. Go figure.
One last thought for you to consider: Encourage your teenager to take a financial literacy class in high school or at a community workshop. Sometimes, it’s easier for teenagers to absorb information from qualified strangers than qualified parents.
Chris Farrell is economics editor for “Marketplace Money.” His e-mail is firstname.lastname@example.org.