Why get a minor a credit card? It can help them learn healthy money habits from the start. Look at what happens if you don't: One trap that virtually every young adult seems to fall into—and that sometimes might even require a rescue from mom or dad—is credit card debt.
The ease with which credit cards allow people to buy now and figure it out later, combined with an overwhelming marketing push aimed at young consumers, has led to an epidemic of maxed-out 20-somethings. But it's possible to teach your kids good credit habits, particularly if you start while they're still under your roof. It's important to think through the pros and cons of getting them a card and when it would work best for your child. Here's what to do if you decide now's the time.
- Having access to a credit card can help a minor learn healthy spending habits and begin to build a credit history.
- The best choice for a younger teenager may not be a credit card, but a debit card tied to a bank account.
- Parents should have their kids do their own research to learn about different credit card terms and, especially, how interest rates work.
- When the child is 21 or 22, it's probably time for the parent to step back and let them take it from there.
Building Credit Early
Many parents help their children get a first credit card so they can build credit. While establishing a credit history for your child is a valid reason for taking this step, it's definitely not the most important one. How long someone has used credit is only a minor factor (15%) in calculating their credit score. Far more important (35%) is their payment history, specifically how often they have paid their bills on time—or not.
Unfortunately, kids who get a credit card early to build credit can, instead, end up damaging their score by using the card irresponsibly. If you're going to help your children build credit through a card, your biggest efforts should go into helping them understand what credit means and how to build good financial habits.
As a general rule, a child must be 18 or older to get a card in their own name, so until that age they will probably have to be an authorized user on a card that is in your name.
Instilling Healthy Habits
Teaching your children good spending habits and a healthy mindset around credit cards is the single best reason to get them a card while they're living with you—and are still in a position to learn from you. The vast majority of people who find themselves overwhelmed with debt got there one purchase at a time. As a parent, educating your children, day by day, about the difference between needs and wants, immediate gratification and the deferred variety, will go a long way toward keeping them out of trouble.
Before you put your child on your card as an authorized user, sit down with them and agree on guidelines, such as going over their purchases together each month and that the child will pay those bills in full unless you agree that, for a particular purchase, they can pay less than the full bill for a month or two.
Avoiding Impulse Purchases
By reviewing your children's monthly purchases with them and processing the rationale behind each one, you can help your kids gain insight into the impulsive thinking that causes some people to spend more than they can afford. Likewise, by enforcing timely payments of the entire month's charges, you'll help them to avoid the two things that can hurt their credit score the most: late payments and high balances.
Providing a Safety Net
Of course, good credit habits are behaviors we hope our children will choose on their own, but part of being a young adult is making the occasional mistake and learning from it. Unfortunately, this kind of "learning opportunity" can stay on a credit report for years.
Another reason to get your children their first credit card while they are still under your roof is that you can provide a safety net. By being able to watch over their shoulders, you'll be sure the dog doesn't eat their payment, they don't get duped into wasteful monthly charges, and identity thieves don't hit the jackpot at their expense.
Best Credit Cards for Kids
The ideal time to put a card in your children's wallets is in high school, but instead of a credit card, start them off with a debit card that deducts money directly from their bank account. Whether with a weekly allowance or a paycheck from their first jobs, they'll get used to the responsibility of carrying a card and not buying more than they can afford to pay for. Then, you can advance to a real credit card. Here are some options beyond simply making them an authorized user on one of your accounts:
Secured credit card
One option for kids is a secured credit card, which limits how much they can charge based on how much you deposit with the card issuer.
Here are some other options:
Service station or gas card
Once your kid starts driving, consider getting them their first gas credit card. More likely than not, the card will have to be in your name. However, just having a gas card will allow them to get their feet wet with credit without the temptation or ability to go off the deep end. Also, because many gas stations now have mini-marts, it allows them to make small purchases that they'll still be required to budget and account for at the end of the month.
Low-limit credit card
After high school graduation, consider getting your child a credit card that they can use in tandem with their debit card. Ideally, the credit card should have a low limit (maximum of around $500), a low interest rate, and a low (or no) annual fee.
Emergency-use credit card
If your child is going off to college or moving to a different town, consider also getting a family "emergency card" in your name but with your child as an authorized user. This is a card that can be safely tucked away in case of a true emergency.
Researching the Best Credit Cards
When it comes to choosing a particular card, have your child do the research and discuss it with you. There are many websites that evaluate credit cards and the rewards they offer, including Investopedia's own credit card ratings, which include ratings of cards for students. Make sure your child reads and understands all the terms on each of the cards under review.
In particular, make sure your child understands how credit card interest rates work. Most kids—and many adults, for that matter—have no idea how fast compound interest can double a credit card balance or how a lower credit score affects the future cost of borrowing. To help your children learn this, have them spend some time online reading up on these topics. Make it a prerequisite for getting a credit card. Chances are you'll learn something, too!
Teaching by (Bad) Example
A good way to help your children learn to use credit cards wisely is to tell them about the times (if any) that you didn't. Explain to them how you got into debt, share with them how you felt in the middle of it all, and tell them how long and how hard it was for you to eventually dig yourself out of it.
The Financial Finish Line
If you're like many parents, your ultimate goal is to help your kids "launch" financially, once and for all. With that in mind, you'll need to establish a finish line, after which you'll let them handle their credit affairs independently. Failing to do this can make them overly dependent on you as a source of financial stability, sometimes for decades to come.
As a general rule, the ideal age to cut credit ties with your child is when they turn 21 or 22 years old. Be sure to let them know the plan a year ahead of time, so they can take any actions they need to. Thanks to your earlier efforts, they should be ready to successfully manage credit on their own.