Growing up: Your teen's first credit card
As a parent, you might balk at the idea of handing your teen a credit card. With proper guidance, though, plastic can a great tool in teaching your older children money management skills and building a credit history.
Young people should be educated about credit before they are on their own, as they will likely end up with a credit card as they move into adulthood. According to the Financial Consumer Agency of Canada (FCAC), 72 per cent of young Canadians aged 18 to 29 have credit cards, and one in every five say their credit card is their first choice of payment.
Plus, credit cards are simply harder to avoid than they used to be. The latest data shows that the use of cash is declining faster than ever and the world is quickly adapting to the new status quo. Cashless payments account for 90 per cent of all transactions in Canada, according to a MasterCard study -- among the highest adoption rates in the world. A 2015 BMO survey showed that 52 per cent of Canadians pay for the majority of their purchases with a credit card.
Credit cards are increasingly becoming a necessity no matter how old you are, says Ann Douglas, parenting expert from Peterborough, Ont., and author of The Complete Idiot's Guide to Raising Money-Smart Canadian Kids.
She recalls when her niece, a third-year university student, boarded an Air Canada flight only to discover the company no longer accepts cash as payment for in-flight food, only credit cards. After flying hungry, the young woman soon signed up for her first card.
"As kids get to the point when they're going to travel on their own, it makes sense for them to have a card," says Douglas. She says they're also useful when it comes time to rent a first apartment -- many landlords like to see some kind of credit history before handing over the keys.
Talk about it first
Before encouraging your teen to sign on the dotted line, be sure to set some ground rules and tell them exactly what the card is for and how it works. Explain interest rates and compounding interest, and how that can spiral out of control, particularly on cash advances that incur interest charges from the time the money is withdrawn.
"Credit cards are not a cash-for-life lottery," says Douglas. "They are for specific purposes and for when you need to present a card."
You should also talk about who will be responsible for paying off the balance. Will you pay for everything, or will your child pay for recreation and splurges?
"It's really awkward if you're trying to discuss this after the fact," Douglas says. "The more you talk ahead of time, the better things are."
Credit cards for young adults
In most places in Canada, you cannot get a credit card until you are 18; in some provinces, the minimum age is even 19. If you want your younger teen to have credit experience, you may be able to make him an authorized user on your credit card account, though not all issuers offer this option to those younger than 18.
Even if that's your situation, if your child is still at home when he or she turns 18, allowing them to become an authorized user at that point can still be beneficial before they head to university. An authorized user gets their own card but shares your account's card limit. Some issuers allow the primary cardholder to set separate limits per authorized user. You are usually responsible for whatever charges they ring up, so be sure to keep an eye on your bill.
If your child is 18 or older, you can co-sign on a credit card for her. In fact, the bank may require a youth to have a co-signer, as they need to build up their credit profile before they'll be able to get a card on their own. A co-signer is also liable for any debt on the account, so if your child doesn't pay up, you'll have to do it for him.
Here are some low-fee cards your teen or young adult might want to consider to get started on building a credit history to be proud of:
Visa Desjardins card
for students only.
This card comes with a few options. Want a low APR of only 12.9 per cent? Pay a $30 annual fee. If your teen is certain he will rarely run a balance, however, going for the no-fee option might be a better bet. The trade-off is a 19.9 per cent rate, which is still cheaper than other similar cards. In addition, the card offers travel and accident insurance and Visa payWave technology, which allows you to make contactless payments.
RBC Cash Back MasterCard.
Not only is there no annual fee, this card includes purchase protection and extended warrantee, which protects card purchases against loss, theft or damage for up to 90 days and doubles the manufacturer's warranty. Plus you can earn rewards: 2 per cent cashback credits on groceries and 1 per cent on everything else. Once those credits reach $25, you can cash them in. The card features a 19.99 per cent interest rate on purchases and MasterCard PayPass contactless payment technology, which allows you to make contactless payments.
Scotiabank Scene Visa.
Who doesn't like to kick back at a movie theatre after exams? This no-fee credit card allows users to earn one Scene point for every dollar spent. For every dollar spent at participating theatres, you earn five Scene points. Points can be redeemed for movies, music and other entertainment rewards. Sign-up bonuses vary, but the Scene card usually comes with bonus points just for signing up or making your first purchase. It features a 19.99 per cent interest rate on purchases and Visa payWave technology.
BMO SPC CashBack Student MasterCard.
This card offers 1 per cent cashback on all purchases and no annual fee. Cardholders also receive 10 per cent to 15 per cent discounts at hundreds of merchants partnered with the loyalty program, plus get exclusive deals and access to concerts, movie premieres, sports events and other entertainment. The card also features purchase protection and extended warranty.
For the true tech-savvy millennial, the branchless bank Tangerine might be appealing. It offers a somewhat customizable credit card with no annual fee and 2 per cent cashback in two purchase categories of your choice, plus 1 per cent cashback on all other purchases. The rewards can be applied directly to your credit card balance or put into a Tangerine savings account. If you opt to deposit your cashback into the savings account, you'll also get to choose a third cashback rewards category.
MBNA Rewards Student Awards MasterCard.
This straightforward rewards card offers one reward point for each dollar you spend. The card has no annual fee and the amount of points you can earn is unrestricted.
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