The best credit cards for teens

Pencils and ABC blocks

Odds are good that your teen will be seduced by the siren song of credit cards once they go off to college. In fact, student loan provider Nellie Mae says that 78% of college students have credit cards with an average balance of $3,200. One in 10 is more than $7,800 in debt.

But you can do a lot to prepare your teen for the temptations of credit while they're still at home under your watchful eye. Like anything, the key is to start them out slow and gradually increase their freedom as they prove their ability to handle credit responsibly.

Step 1. Give them a crash course in credit.

Conduct your own credit seminar by reviewing one of your credit card statements with them. Explain the different elements such as the interest rate, interest charges, and minimum amount due. Then have them play with an online debt calculator to figure out how long it would take to pay your balance off with just the minimum payment. Also, have them plug in the cost of an item they want at your card's interest rate to see how much it could truly end up costing to buy it on credit.

Step 2. Start your teens out with a prepaid debit card.

These are a type of stored-value card much like gift cards or prepaid calling cards. You simply load the card with your kid's allowance, or money for specific purchases, and let them shop on their own.

If you choose one that won't let your teen go over the credit limit, such as the UPside Prepaid Visa, there's very little financial risk.

For $24.95 a year, the Upside Edge Visa allows you to load and reload the card in amounts as small as $25 for no charge from a checking account or a $2.50 fee if you transfer it from a credit card.

Unlike most prepaid debit cards, there's no transaction fee when the card is used to make a purchase. It only costs $1.49 to get cash from an ATM and 99 cents to use one of the machines to find out the balance on the card. With 24-hour access to account information online, you can monitor your teens' purchases virtually as they occur.

But when you hand over the card make it clear that is all they're getting -- even if they run out of money, the bank of you is closed. They'll quickly learn how that $150 pair of jeans can drain their account and make it impossible to buy other things they want.

Added bonus: You no longer have to figure out which child charged $20 worth of online music to your credit card.

Step 3. Graduate to a checking and savings account with a debit card.

This is especially useful once the teen begins working a part-time job. Because the money comes directly from their account, they still can't go too spend crazy. But with your help, they'll learn the importance of tracking their spending and reconciling their monthly statements -- or risk overdrawing their account and paying steep fees.

Step 4. Re-establish the rules.

By now your teen probably think they've got this credit card thing figured out even though they haven't had the chance to run up any debt. So before taking the plunge and giving them their first real credit card you need to remind them that you're still in charge. Explain what they can or can't purchase, what types of purchases you want them to discuss with your first, your expectations -- such as paying the balance in full each month and not exceeding the credit limit -- and what the consequences will be if they break the rules.

Step 5. Take the training wheels off with a real credit card.

Don't add them on to one of your existing accounts -- your higher credit limit and teens' tendencies to lose things makes the risk too great.

Get them their own card, but one that will only allow them to run up $200 to $500 worth of debt. Elan Financial, for example, offers a Young Adult Visa or MasterCard for teens at least 16 years old with a co-signing adult. Interest rates currently start at 14.24% with no annual fee the first year or any year the teen uses it to make a purchase.

Once the monthly credit card statements start arriving, take advantage of the opportunity to discuss savvy money management. What did they spend the money on -- and why did they charge it instead of using cash? Did they waste money any unnecessary fees? After about a year, you should also have your teen look at their credit reports so they can see how what they do goes on a record that's seen by everyone from banks to potential employers.

Overall, a little preparation in high school can go a long way toward helping your teen develop healthy money habits for the years to come.

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