My Teen Maxed Out My Credit Card -- Now What?

Imagine this scenario--you give your teenager a credit card with explicit instructions that it's only to be used in an emergency. Unfortunately, your teen's idea of an emergency (a major sale at the mall!) and your idea of an emergency (running out of gas) are two completely different things. Before you know it, your teen has maxed out your credit card. Now what? 

The good news is there are a number of different ways you can handle this without destroying your bank account or your credit score. 

The Law and Your Credit Cards

First of all, it's important to know the law regarding your credit card. The Fair Credit Billing and Truth in Lending Act protects you from unauthorized purchases, meaning you're not responsible for purchases you don't specifically authorize. This includes purchases made by family members. 

Although the law tends to side with the consumer, it doesn't put you completely off the hook, depending on your card issuer. For example, Bank of America and Capital One do not cover unauthorized purchases unless your card has been reported lost or stolen. When you file a report with your credit card company over unauthorized charges, they conduct their own investigation. In some cases, they may ask for a police report, although you are not legally obligated or required to provide this information to validate your claim.

The card issuer may dispute the fraud claim and refuse to reimburse you altogether, forcing you to either take legal action or pay up. By law, an unauthorized purchase is an unauthorized purchase, whether by someone who stole your card or by your teen who racked up charges on apps. This was recently illustrated when Apple was forced to pay a $32.5 million settlement to reimburse parents for unauthorized charges of their kids' in-app purchases after initially refusing to do so. 

What To Do If Your Teen

If your teen has run amok with your credit card, here's what you can do: 

• Report the unauthorized charges to your credit card company. Depending on the company, you may have to submit this in writing. From here, they'll instruct you on what to do next. You will also have to notify them in writing as a follow-up to your phone call.
• Decide whether or not you will pay the charges. By federal law, your maximum liability for unauthorized charges is $50. If your teen maxed out your card, however, you may want to use it as a teaching moment and make him or her reimburse you for the things they bought. Depending on the card limit or the amount charged, this may or may not be practical. For example, if your teen maxed out a card with a $500 limit, the ramifications on your credit and your bank account are different than with a card with a $5,000 limit. 
• Save all documentation. If the fraudulent charges have affected your credit, make sure you save all documentation and file disputes with the major credit card companies.

While there are things you can do if your teen maxes out your card, the best step to take is prevention. Make sure your teen understands what the card may and may not be used for, and monitor use. This will help you avoid any unpleasant surprises when you open up your statements.