Why Are Teenagers Barred from the Financial World?

Isaiah Steinberg, '23 • October 8, 2021

Several key barriers are implemented for teenagers by the regulation of the use of financial services for minors. From credit cards to PayPal to investing to bank accounts in general, money-making teenagers under 18 are not given access to services that money-making adults are.

To make use of any service that involves the use of money, be it online or in person, a bank account is required. But multiple obstacles stand in the way of teenagers at this crucial step in their young lives. Why is this?

A joint account is an account in which the parent and the child have equal access to the bank account and everything in it, and it is better suited to older teenagers who have not quite turned 18. Both owners can withdraw money from the account without the knowledge of the co-owner. Many minors dislike joint accounts because although they offer more freedom than custodial accounts, joint accounts are susceptible to claims, debt collection, and more that relate to the parent’s use of money in the account.

Some banks disallow children below a certain age (such as 13) from withdrawing money from a joint account without a parent’s signature. Your parents may also be subject to the “kiddie tax,” which was imposed by the U.S. government in 1986 in response to some parents circumventing taxes by transferring money to a minor’s account. The kiddie tax simply prevents parents from avoiding these taxes. All unearned income over a certain threshold in the child’s account is taxed at the parent’s marginal income tax rate (the amount of additional tax paid for every additional dollar earned as income). The child’s unearned income comes from sources other than from working. The kiddie tax applies to those aged 19 and under, and also dependent full-time students between the ages of 19 and 23. If you visit your local bank with one of your parents, a banker can help you set up your own savings or checking account.

I’ve found my bank account to be useful for making purchases quickly on Amazon without having to ask my mom for her login, storing my summer job earnings, and selling old things I have lying around my house on eBay quickly and easily. Having my own checking account also gives me a feeling of freedom and responsibility and allows me to learn about how to manage my money, so I would recommend it.

Credit unions differ from banks in that they are nonprofit, while banks are for profit. A credit union is a cooperative organization owned by its members who typically have something in common, such as what industry they work in. Because credit unions are not-for-profit, they are exempt from federal taxes, and some even receive subsidies. Credit union members generally get lower interest rates on loans and pay fewer fees. Because credit unions are owned by their customers, their customer service is usually excellent. Additionally, your membership in a credit union is usually for life, even if you leave the industry served by the union. Credit unions also offer financial education for free to their members. There are also no minimum balance requirements with credit unions, lower deposit requirements, and lower overdraft fees. However, some people choose banks because they are open to anyone, they typically have more branches and ATMs, they usually have better financial technology such as mobile banking, and they offer more options when it comes to loans and credit card perks.

If a child is under 16, they usually have to go to a credit union branch with a parent or guardian to sign up for an account. There is also often no membership fee for children. Credit unions offer many of the same features as banks, including credit and debit cards, so you will likely see little difference in your day-to-day lives (and online shopping) between a bank and a credit union.

Debit cards don’t allow teens to sink into debt, but credit cards help them build credit ratings and offer better consumer protections (fraud protection, for example). You must be 18 to 21 to have a credit card in your name (depending on the state), but you are not out of options.

A parent or guardian can add their child as an authorized user of their bank account, allowing them to make purchases with their credit card. Those aged 18 to 21 can also get a credit card if they can prove they have “independent means” to pay their bills. The primary cardholder still remains responsible for the balance on the card, however. No local governments in the U.S. have set a minimum age for an authorized credit card user, but many credit card companies have set a minimum age of 15 or 16.

It is easier as a minor to get a debit card, with some banks allowing kids as young as eight (although it’s usually more like 13) to use them, as long as a parent is a co-owner. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD) is a law intended to curb deceptive and abusive practices by credit card companies. Among other things, the act limited companies’ ability to market to college students, and raised the minimum age for a card to 21. The federal government enacted this specific change because many card companies targeted college campuses with giveaways. The college-aged consumers were not aware of what they were signing up for, and they received high interest cards that sank many of them into debt.

Detractors of credit cards for teens argue that credit cards offer no benefits for teenagers. They argue that financial literacy among high schoolers is at its lowest point ever (according to JumpStart Coalition), and that minors do not need to establish a credit score before they know how a credit score even works. Proponents of credit cards for teens and young adults claim that young people simply are not bad borrowers.

Andra Ghent, an assistant professor at the W.P. Carey School of Business at Arizona State University, researched the outcomes of giving people under 21 credit cards. Her research found that young people were likely to miss payments for 30 or 60 days, but not for serious defaults of 90 days. She even determined that if you get a card at age 20, you’re less likely to default (have your account closed and be chased by debt collectors) than if you wait until age 25. The main – and probably the best – way to spend money reliably under the age of 18 is to get a debit card attached to a custodial (not joint) account.

PayPal used to offer a student account with a parent as the owner, but they got rid of the feature because you have to be 18 years of age to enter a legally binding contract in the U.S. PayPal’s E-Commerce Services Agreement, which every user must agree to when signing up, was introduced in 2020. According to the agreement, “This E-Commerce Services Agreement is a legally binding contract between you and PayPal Pte. Ltd. and applies to your use of the Services.” When you sign up for PayPal, you must put in information — such as your birthday — that matches with the information you gave your bank account when you signed up. PayPal actually does check this, as I learned the hard way. After creating an account with a fake birthday in an attempt to skirt PayPal’s rules, I tried to change the name on the account twice (because I thought I had made an error, realized I hadn’t, and changed it back), which PayPal flagged as suspicious. They then required me to upload a picture of my photo ID (I used my passport). A few days later, they locked my account because they found that my birthday was false.

I found that the best way to legitimately use PayPal under 18 is to create an account with your parent’s permission that has their name and information on it. Because a parent’s information is also on the bank account of the minor, PayPal will not flag the account. Unfortunately for me, when my original account was limited and I then tried to start a new — legitimate, I might add – account with my mom’s information, I could not link my one and only bank account because I could not unlink it from my limited account first. If PayPal finds a user under 18, they will lock their account and keep all the funds in the account’s wallet, so the best alternative is simply to make an account with your parent/guardian. There was even a popular story on Medium written by a user who created his account in 2007 at age 17, and had his account banned ten years and thousands of dollars later in 2017 when PayPal found out. PayPal’s customer service is regarded as not being very good, so make sure you make an account the legal way if you’re under 18 years old.

But this is not the only way minors can invest in the stock market. Two important factors to consider are: teens under 18 must invest via a custodial account on a stock trading app (minors are not allowed to own stocks, mutual funds, and other financial assets outright), and teens have limited investment opportunities. Because teens generally don’t have a ton of money, they cannot invest in mutual funds (investments that pool money from investors to purchase stocks, bonds and other assets, which creates a diverse portfolio). Teenagers can own the assets in a custodial account, but the parents would monitor and help control the investments. Be sure to look for online stock brokers with no fees, no minimum balance requirements, and brokers that sell fractional shares (buying a portion of one share can be useful when a stock is really expensive and you can’t afford a whole share). Robinhood actually meets all three of these criteria, but so do some other brokers.

For low-risk investing, teens could consider an index-based exchange traded fund (ETF). These are investments that represent a diversified group of companies that trade similarly to individual stocks.

Minors can also establish a Roth IRA, which were established as a way to save for retirement but can also save people money. A Roth IRA is a pool of investments in which you can deposit stocks, bonds, and more. Minors can establish Roth IRAs only if they have earned income from a job. A custodial account is required to establish a Roth IRA under 18, and these funds can be established on brokerage sites such as Acorns, or with your bank. You can make annual contributions with after-tax income which is used to make investments that go into the Roth IRA. How much you contribute is determined by your earned income, and the maximum yearly contribution established by the Internal Revenue Service (IRS) is $6,000 ($7,000 for those 50 years old and older). To learn about even more forms of investing such as savings bonds, Series EE Bonds, and more, click here.

Why all the proverbial red tape barring teenagers from the financial world? “You’re still learning, you’re still growing up, and unfortunately the schools don’t teach students about their financial wellness. Most of the kids don’t even know how to write checks. So as long as you are underage, you have to have a guardian with you on the account so they can guide you if you do not understand anything. If anything went wrong, the adult would be in charge of the account,” says local KeyBank personal banker Rima Arnold. “It’s for security purposes. Fraud is all over the place, and sometimes other people take advantage of young adults and teenagers. Sometimes they try to get information from you to hack you, so we are very protective of that.”

Arnold also brought up a point about legal repercussions, which also pertains to PayPal and their legally binding contract restrictions. “[PayPal] wants somebody adult in case there is any legal issue, fraud, or anything in which they would have to talk to you. They would talk to the adult, not the underage person. Basically it’s a way to keep you away from any legal issues. As a financial institution, they want to have the adult in charge, not the minor, so they don’t have to go through legal issues.”

Some restrictions are set in place by the government, while some are decided by individual banks. “Each bank has their own regulation and they have their own procedure. But overall, the federal government controls a lot of the stuff that we can and cannot do. For example, I just did a wire. This wire cannot go through if the federal government does not monitor it and make sure it is all legal; coming from a legal account, going to a legal account. That’s because of money laundering. The federal government also has to control our rates sometimes. Each state is different, each city is different, and each bank is different. Their compliance may be different than ours, and that’s regulated by the federal government. They keep an eye on us, basically. Regarding accounts, it’s up to the bank to decide an age restriction. Usually it starts at 13 and older. The government does not decide what age banks will open an account at, as long as it’s over 13. For credit cards, you cannot apply under the age of 18, even with your parents. And that’s basically from the government, not from us.”

Arnold also pointed out that there is only one main regulation put in place on minors in terms of online banking, besides the use of credit cards. “We do not control how much you use, but you may be controlled by the amount of money in your account. You have the right to purchase stuff from your card attached to your account online. As long as you have the money, you can purchase something from a store. Some transactions you are not allowed to do as a minor. In certain accounts, you cannot transfer money between accounts. Your parents have to transfer it if you’re underage. When you transfer accounts, you’re moving money to somebody else. You have to monitor it for money laundering. We always like to have adult supervision so they catch it if something goes wrong, before it happens. It’s basically for your own benefit. That’s the only restriction under 18. With certain accounts, such as KeyBank Smart Checking Accounts, you can transfer money under 18 without adult supervision. It depends on the account.”

It’s not like minors can’t do anything in banking either, says Arnold. “We open accounts for 13-17 year-olds with their parents, but they still have access online. They can do online banking, they can use their debit card online, they can do anything else, but just under the supervision of an adult.”

In terms of why regulations such as the Credit CARD Act were implemented in the first place, Arnold had answers as well. “[The government] saw a lot of kids taking advantage of their money, spending on things they should not spend it on. We started having more problems. More robbery, more fraud. Some kids would use the money in their account to purchase drugs, which hurt them. And they abused the cards. The kids sometimes use credit cards without thinking. You start swiping, and suddenly your account is in the negative. Why? Because you did not check how much you had. So after that, they created the compliances. Sometimes kids do a better job than adults, but you never know. [The regulations] protect you from any kind of transaction you might get into without even knowing.”

While there are options for minors to get involved and begin to manage their own hard-earned money, these options are limited. It seems that the restrictions will not be loosened anytime soon, so children will have to continue to follow the current strict rules regarding bank accounts, PayPal, credit cards, and other financial institutions.

Minors cannot open a savings or checking account in their own name, but there are two options they can use to learn financial literacy in the digital age. A custodial account is an account managed by an adult custodian until the minor turns 18 (in most states the age of majority is 18, but in some it can be up to 21). Crucially, the money in the account actually does belong to the child. Parents who add money cannot withdraw it from the account unless it is used for the minor’s exclusive benefit. The account typically becomes a sole account upon turning 18. A joint account is an account in which the parent and the child have equal access to the bank account and everything in it, and it is better suited to older teenagers who have not quite turned 18. Both owners can withdraw money from the account without the knowledge of the co-owner. Many minors dislike joint accounts because although they offer more freedom than custodial accounts, joint accounts are susceptible to claims, debt collection, and more that relate to the parent’s use of money in the account. Some banks disallow children below a certain age (such as 13) from withdrawing money from a joint account without a parent’s signature. Your parents may also be subject to the “kiddie tax,” which was imposed by the U.S. government in 1986 in response to some parents circumventing taxes by transferring money to a minor’s account. The kiddie tax simply prevents parents from avoiding these taxes. All unearned income over a certain threshold in the child’s account is taxed at the parent’s marginal income tax rate (the amount of additional tax paid for every additional dollar earned as income). The child’s unearned income comes from sources other than from working. The kiddie tax applies to those aged 19 and under, and also dependent full-time students between the ages of 19 and 23. If you visit your local bank with one of your parents, a banker can help you set up your own savings or checking account. I’ve found my bank account to be useful for making purchases quickly on Amazon without having to ask my mom for her login, storing my summer job earnings, and selling old things I have lying around my house on eBay quickly and easily. Having my own checking account also gives me a feeling of freedom and responsibility and allows me to learn about how to manage my money, so I would recommend it.

Although many online services now allow direct payment via a bank account, credit cards or debit cards are still commonly required to make payments online. Parents are increasingly trusting their teens and tweens with credit and debit cards so they can learn important life lessons about money. Each option, debit and credit, has its advantages. Debit cards don’t allow teens to sink into debt, but credit cards help them build credit ratings and offer better consumer protections (fraud protection, for example). You must be 18 to 21 to have a credit card in your name (depending on the state), but you are not out of options. A parent or guardian can add their child as an authorized user of their bank account, allowing them to make purchases with their credit card. Those aged 18 to 21 can also get a credit card if they can prove they have “independent means” to pay their bills. The primary cardholder still remains responsible for the balance on the card, however. No local governments in the U.S. have set a minimum age for an authorized credit card user, but many credit card companies have set a minimum age of 15 or 16. It is easier as a minor to get a debit card, with some banks allowing kids as young as eight (although it’s usually more like 13) to use them, as long as a parent is a co-owner. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD) is a law intended to curb deceptive and abusive practices by credit card companies. Among other things, the act limited companies’ ability to market to college students, and raised the minimum age for a card to 21. The federal government enacted this specific change because many card companies targeted college campuses with giveaways. The college-aged consumers were not aware of what they were signing up for, and they received high interest cards that sank many of them into debt. Detractors of credit cards for teens argue that credit cards offer no benefits for teenagers. They argue that financial literacy among high schoolers is at its lowest point ever (according to JumpStart Coalition), and that minors do not need to establish a credit score before they know how a credit score even works. Proponents of credit cards for teens and young adults claim that young people simply are not bad borrowers. Andra Ghent, an assistant professor at the W.P. Carey School of Business at Arizona State University, researched the outcomes of giving people under 21 credit cards. Her research found that young people were likely to miss payments for 30 or 60 days, but not for serious defaults of 90 days. She even determined that if you get a card at age 20, you’re less likely to default (have your account closed and be chased by debt collectors) than if you wait until age 25. The main – and probably the best – way to spend money reliably under the age of 18 is to get a debit card attached to a custodial (not joint) account.

PayPal, now owned by eBay, is an electronic money transfer company founded in 1998. On the PayPal website or in the mobile app, one can pay for goods and services (which comes with consumer protections) or send money to family and friends to, for example, pay for dinner. PayPal is often touted as the safest way to pay, and it is thus commonly used for online purchases from retailers such as Amazon. PayPal also has its own MasterCard credit and debit cards for consumers to use in physical stores, and many stores also offer a QR code customers can scan, which brings them to a PayPal payment link. PayPal used to offer a student account with a parent as the owner, but they got rid of the feature because you have to be 18 years of age to enter a legally binding contract in the U.S. PayPal’s E-Commerce Services Agreement, which every user must agree to when signing up, was introduced in 2020. According to the agreement, “This E-Commerce Services Agreement is a legally binding contract between you and PayPal Pte. Ltd. and applies to your use of the Services.” When you sign up for PayPal, you must put in information — such as your birthday — that matches with the information you gave your bank account when you signed up. PayPal actually does check this, as I learned the hard way. After creating an account with a fake birthday in an attempt to skirt PayPal’s rules, I tried to change the name on the account twice (because I thought I had made an error, realized I hadn’t, and changed it back), which PayPal flagged as suspicious. They then required me to upload a picture of my photo ID (I used my passport). A few days later, they locked my account because they found that my birthday was false. I found that the best way to legitimately use PayPal under 18 is to create an account with your parent’s permission that has their name and information on it. Because a parent’s information is also on the bank account of the minor, PayPal will not flag the account. Unfortunately for me, when my original account was limited and I then tried to start a new — legitimate, I might add – account with my mom’s information, I could not link my one and only bank account because I could not unlink it from my limited account first. If PayPal finds a user under 18, they will lock their account and keep all the funds in the account’s wallet, so the best alternative is simply to make an account with your parent/guardian. There was even a popular story on Medium written by a user who created his account in 2007 at age 17, and had his account banned ten years and thousands of dollars later in 2017 when PayPal found out. PayPal’s customer service is regarded as not being very good, so make sure you make an account the legal way if you’re under 18 years old.

Investing in stocks at a young age is a great way to learn about wise financial decisions. My father made me a Robinhood account a few months ago for my birthday and deposited $1,000 into it. The caveat was that I cannot withdraw money until I turn 21. This allows me to invest with no real downside, and it allows me to learn lessons so that I won’t make mistakes when it really matters (luckily, I have made money on my investments so far). But this is not the only way minors can invest in the stock market. Two important factors to consider are: teens under 18 must invest via a custodial account on a stock trading app (minors are not allowed to own stocks, mutual funds, and other financial assets outright), and teens have limited investment opportunities. Because teens generally don’t have a ton of money, they cannot invest in mutual funds (investments that pool money from investors to purchase stocks, bonds and other assets, which creates a diverse portfolio). Teenagers can own the assets in a custodial account, but the parents would monitor and help control the investments. Be sure to look for online stock brokers with no fees, no minimum balance requirements, and brokers that sell fractional shares (buying a portion of one share can be useful when a stock is really expensive and you can’t afford a whole share). Robinhood actually meets all three of these criteria, but so do some other brokers. For low-risk investing, teens could consider an index-based exchange traded fund (ETF). These are investments that represent a diversified group of companies that trade similarly to individual stocks. Minors can also establish a Roth IRA, which were established as a way to save for retirement but can also save people money. A Roth IRA is a pool of investments in which you can deposit stocks, bonds, and more. Minors can establish Roth IRAs only if they have earned income from a job. A custodial account is required to establish a Roth IRA under 18, and these funds can be established on brokerage sites such as Acorns, or with your bank. You can make annual contributions with after-tax income which is used to make investments that go into the Roth IRA. How much you contribute is determined by your earned income, and the maximum yearly contribution established by the Internal Revenue Service (IRS) is $6,000 ($7,000 for those 50 years old and older). To learn about even more forms of investing such as savings bonds, Series EE Bonds, and more, click here.

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