How To Choose the Best Bank Accounts for Teenagers

By NYMetroParents Staff November 12, 2012

Go Banking Rates offers advice on how to choose the best bank account for your teenager. Taking on financial responsibility is a big step for teens, and these tips can help you navigate through the benefits, risks, and rewards of setting up a bank account for your teenager.

Banking for Teenagers

At some point in time, nearly every teenager becomes financially independent. Of course, the transition from dependency to self-sufficiency can take years and produce a fair amount of parental anxiety, especially when trying to find reliable banking for teenagers.

Parents who wish to encourage good financial decision-making and nudge their children towards prosperity may find it useful to open bank accounts for their teenagers. This may be the single most important money-management decision that parents can make for their still-dependent adolescent.

Deposit Accounts

Many banks offer deposit accounts specifically tailored to the needs of young people. In general, these accounts feature low or nonexistent minimum balances, lack overdraft protection and permit employers and student loan providers to make recurring direct deposits of funds.

In many cases, these banking products are structured as joint accounts over which parents may claim ownership. This mitigates some of the risk inherent in giving financially inexperienced teenagers sole control over their own funds. Many parents use their status as joint account-holders to encourage prudent decision-making, often by matching savings account contributions and withdrawing funds in the wake of unwise purchases.

Why Banks Prefer Young Investors

Banks have an interest in permitting cash-poor youngsters to open new deposit accounts: as they secure better-paying jobs and accumulate savings, these young account-holders may diversify their financial portfolios with CDs, IRAs, brokerage accounts and other lucrative investment products.

They may also become serious borrowers who look to familiar sources for business financing, mortgage products and car loans. Over the years, local banks may earn thousands of dollars in interest and fees from these loyal customers.

Risk of Bank Accounts For Teenagers

Despite their obvious benefits, bank accounts for teenagers are not without their risks. Each of the three principal parties to any minor’s bank account must be cognizant of these issues and actively work to manage them.

Avoiding Long-Term Credit Risks

Teenagers must be aware of the long-term credit risks posed by any financial product. To avoid accidental overdrafts, they should keep a fund “cushion” of at least $50 in any deposit account that they open. Credit reporting agencies tend to have little sympathy for teenagers who make poor financial decisions.

Likewise, parents who exercise joint control over bank accounts for teenagers must be careful to keep them in good standing. Overdrafts, bounced checks and other similar issues can seriously impact the credit scores of joint account-holders and quickly turn a supposedly educational venture into a credit nightmare.

Banking For Teenagers Poses Risks to Banks

While most banks intentionally insulate themselves from the risks associated with bank accounts for young people, they are not completely immune. As they move across the country in pursuit of knowledge or employment, teenagers may change banks with some regularity. They also tend to overdraft far more frequently than their older peers. What’s more, teenage bank account holders who become borrowers as they enter their 20s typically default on their debt obligations at a higher rate than more mature borrowers.

Bank Accounts for Teenagers Safer Than Credit Cards

Nevertheless, bank accounts for teenagers are relatively safe in comparison to some alternative methods of establishing credit and promoting financial know-how. For instance, all major credit card issuers as well as many stores and brands target teenage consumers with low-limit credit cards.

These cards come with many caveats. Brand-specific cards may encourage unsupervised teens to embark on wild shopping sprees that have lasting financial consequences. Even cards that aren’t tied to a trendy store or online retailer may promote overspending.

What’s more, the spending limits on most of these cards are so low that a couple of big purchases may push the cardholder’s debt-to-credit ratio into unhealthy levels. Even a relatively prudent teenager may have trouble limiting their monthly charges to less than 10 percent a card’s spending limit.

The debit cards associated with teenager-friendly bank accounts accomplish the same educational goals as standard-issue credit cards, and also have fewer negative consequences to quell the nerves of anxious parents.

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