Credit Cards for Kids: What You Need to Consider
By Kate Ashford
Not every parent is sure about mixing kids and credit - or how to know when a kid is ready for the responsibility that comes with using a credit card. That uncertainty contributes to a statistic that claims that only 58% of soon-to-be-college-graduates said they had a credit card, according to a recent Experian College Graduate Survey.
Nevertheless, credit cards can offer useful lessons in a child’s financial education. “A credit card can be a great tool for teaching kids about money, mostly because teaching your child how to responsibly use a credit card often leads to all kinds of money conversations about budgeting, avoiding debt, and planning for big goals,” says Kimberly Palmer, credit cards expert at NerdWallet. “Every time the bill comes due each month, you can review the spending together and talk about the importance of paying it off in order to avoid interest and fees.”
As many adults already know, smart credit card usage and repayment habits can help build a strong credit score. And because a credit score is used for an increasingly large number of things, from car insurance to loan rates to employment, establishing a healthy credit history early can give your child a head start.
Susan Helene Gottfried hasn’t gotten her oldest child a credit card yet - but she plans to get him started on plastic once he gets his driver’s license.
“I figure with freedom comes responsibility, and he’ll be in spots where he may run low on cash,” says Gottfried, 48, who lives in Wexford, PA. “And I certainly don’t mind the extra cash rewards his spending will generate.”
Gottfried’s son understands that he’ll be responsible for paying off whatever he charges to the card. “That will give him a full year of using a card before I send him to college with one that he’s fully responsible for,” Gottfried says.
Here are a few things to consider when it comes to putting some plastic in your kid’s wallet.
How to get your child started with a credit card in 3 steps
1. Add your child as an authorized user
Adding your child as an authorized user on one of your existing credit card accounts can help them start building a credit score without the responsibility of having their own card. Plus, this approach “lets the parent monitor the child’s spending,” says David Levy, Editor at college financing website Edvisors. A word to the wise: It’s important to remember that you’re responsible for the charges on your card that your child makes. If you’re concerned about unauthorized charges or out-of-control spending, you can request your credit card issuer to place a spending limit on your authorized user account.
Discuss guidelines with your child first to make sure you’re both clear on how it’s going to work. How much is your child allowed to spend, and what can they spend it on? Will your child need to ask permission first? Who’s responsible for payment, and when? Simple rules established up front can ensure everyone is on the same page.
2. Practice with a debit card for kids
Getting your child a bank account with a debit card can be a good first step toward a credit card. Using a debit card feels a lot like using a credit card - except they’ll be unable to overspend, which is a good lesson to learn.
In fact, when Phil Risher’s mother gave him a debit card as a kid, he thought it was a credit card. “After about a year of being good, I over-drafted my account and my card was declined in front of all my friends,” says Risher, who is the founder of YoungAdultSurvivalGuide.com. “Talk about embarrassing. I went home and explained to my mom how this ‘credit card’ didn’t work.”
In the end, that hiccup forced Risher to learn about money and become more responsible. “My mom probably did not realize how valuable allowing me to fail was at the time, but I attribute most of my success to that experience.”
3. Start your child off with a secured credit card
A secured credit card requires a cash deposit to open a credit card account, and the cash deposit acts as collateral in case the cardholder doesn’t pay his or her bills.
It’s what Lee Harris did for his daughter - he had her earn money at her job toward the deposit. “I told her I would match whatever amount she saved to go into an account for a secured credit card,” says Harris, a certified financial planner in Muskegon, MI. “I felt this gave her value in knowing that the card was secured and she had earned the money in order to establish the card. I told her when she had good payment history for a year I would help her get an unsecured card.”
Why a credit card may help your child
Many adults already know that a credit card is good for emergencies. If you worry about your child getting stranded with no cash, a credit card could relieve your concerns.
“In addition to the chance to teach your child about money through responsible use of the card, it also can offer parents a sense of security to know that in an emergency, the child has the ability to pay for expenses, especially as they explore the world more on their own,” Palmer says.
Credit cards are also a great way to help your child plan for the future. The last thing you want is for your child to use credit for the first time after they’ve left home, without the safety net of you. It’s far better for them to fail before the stakes are high, so they learn responsible credit habits once they’re out in the world.
Experts generally feel that a credit card is a good financial tool to introduce when your child enters a new phase of life, such as driving, starting college, or getting their first job. But if you have a responsible kid and you’re willing to supervise and teach, the early teen years might also be a good time to start credit training.
Although a credit card can be a helpful tool, be mindful about choosing one for your child. ”Be sure you get the card that makes the most sense for your spending habits,“ Palmer says. “And talk through all those reasons so your child has a chance to understand the various options.“
It’s a big marketplace, so walking them through it - and teaching them how to avoid credit card debt - is an increasingly important thing for parents to do.
Kate Ashford is a freelance journalist who writes about personal finance, work and consumer trends. She has written for BBC, Forbes, LearnVest, Money, and Parents, among others.