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Pitfalls of getting your child a credit card

On Thursday, I wrote about taking advantage of the back-to-school shopping ritual as a time to talk with your teenage children about money and teach them some of the basic financial skills they will use for the rest of their life.

But a question that will almost always come up when shopping and spending money with a teenager is this: What is the right age or time for a student to get their first credit card?

But before diving into credit cards, the first financial product students should learn to use is a suitable bank account. If you have a teen in high school or a young adult going off to college this Fall, he or she will need a bank account that provides an easy way to deposit and access their money.

Student Bank Accounts

Most banks offer checking accounts tailored to students and are available to students age 16 and over. If the student is under 18 years old, then they'll need an adult as co-owner of the account.

The first thing to consider is fees. Many banks offer terms where there is unlimited free access to that bank's ATMs and up to five free transactions per month at other banks ATMs. Look for no monthly account maintenance fee, which is usually allowed as long as paperless statements are elected and the debit card is used at least once every few months. Students will need pay bills online and write an occasional check or two, so look for these features with no fees attached.

Other features to look for are mobile banking, including the ability to deposit checks using a camera-equipped smart phone. Check out Bank of America, Citibank, Wells Fargo and TD Bank to research and compare some of the top-rated student friendly bank accounts.

I'm not a fan of the overdraft credit feature included with many bank accounts. This allows spending money that isn't there and results in hefty fees when used.

Parents who want to monitor their child's spending can set up online access to the account and also request to receive duplicate statements. With web access, parents can even transfer money online to their child's account on a scheduled basis or as needed.

Student Credit Cards

Since the passage of the CARD Act, individuals under 21 are restricted from getting a credit card account on their own unless they have an adult co-signer. So parents can use this law as the response when their teen insists they have to have a credit card.

I advise that parents never sign jointly for a student's credit card. This is an invitation to credit problems and raises the risk of identity theft when a student's card is lost or stolen.

If a credit card is a necessity, then open a new credit card account with daily limits for transactions and a low initial credit limit. Set up the credit card account to receive email or text alerts of transactions, balance notifications. Take advantage of online access to view the account activity.

Even though the CARD Act restricts marketing of credit cards on college campuses, cards are offered there as part of the promotions for bank accounts. And students under age 21 do not have to have a parent co-sign for the card -- they can have an older sibling or friend co-sign. Even if you are against it, there is a good chance your college student will come home with a credit card.

The typical logic for wanting a credit card is a good one: to establish and build a credit history. So it's not a bad idea for a college student to get a to get a credit card as long as he or she is ready to use it responsibly.

But irresponsible credit card use can be a disaster for a young person. A few late payments can result in a poor credit rating that can take a long time to improve. Parents need to make sure their children know that having a spotty credit history can mean being turned down for a car or apartment loan. It can even lead to getting turned down for a good job as more employers are performing a credit background check as part of their application process.

Bottom line: If you teach your children how to manage their spending before they go off to college, they will grow into young adults who are less likely to get into financial difficulty later in life.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.