Getting a minor a credit card can help them learn healthy money habits and learn how to manage credit card debt.
Giving your child a credit card can come with risks, including the risk they will overspend. But when they have a credit card they can learn important lessons about how revolving debt works. You can help teach your child the pros and cons of having a credit card. Learn whether getting a credit card may be right for your child.
- Having access to a credit card can help a minor develop healthy spending habits and begin to build a credit history.
- Adding your teen as an authorized user on one of your accounts can help them start building credit.
- You can explain why good credit is important with real-life examples.
- Have kids research different credit card terms and how interest rates work.
Building Credit History
One major advantage of a minor having a credit card is that they can build credit and establish a credit history. The length of credit history accounts for 15% of a credit score. Payment history, or whether you have regularly paid your bills on time, accounts for 35%.
Consider adding a child as an authorized user to one of your credit cards that has a history of on-time payments with a low utilization percentage (meaning a high limit and a low balance). This is one of the easiest ways to help your teen have good or excellent credit.
One risk with adding a child as an authorized user is you would be responsible for their spending. Before adding a minor as an authorized user, have a conversation about spending expectations. If you are worried about their spending, you may want to simply add them as a user but not provide them with the card to spend.
You could help a minor set up a monthly auto-draft from their bank account that pays off their spending limit every month.
Lesson in Good Credit
You can teach minors that a main benefit of using a credit card responsibly is that it can help improve your credit score. Show them how much money they can save on a house or a car if they have excellent credit versus poor credit.
For example, you can ask them to choose their dream car. Then plug in the purchase price of that car in an auto loan calculator like the one below.
You can use the calculator to illustrate the difference between the monthly payment for someone with a 740+ credit score and a good interest rate versus someone with a poor credit score of 580.
Remind teens that bad credit can prevent you from getting a job or renting housing.
Instilling Healthy Habits
Teaching good spending habits and a healthy mindset around credit cards are advantages to getting them a credit card.
As they use the card, you can educate them about the difference between needs and wants, and between impulse buys and planned purchases.
Before you give your child a credit card or add them as a user, establish rules. You might want to set a time to review their purchases each month or require that the child will pay for their purchases.
Avoiding Impulse Purchases
Reviewing a child's monthly purchases with them and discussing the rationale behind each one can help them gain awareness about impulsive purchases.
By enforcing timely payments for their spending, you’ll help them avoid the two things that can hurt their credit score: late payments and high balances.
Providing a Safety Net
Part of becoming an adult is making mistakes and learning from them. Unfortunately, this kind of learning opportunity can stay on a credit report for years.
Another reason to give credit card to a child instead of waiting until the become an adult is that you can provide a safety net for them if they make mistakes.
Best Credit Cards for Kids
Before giving them a credit card, you may want to provide a debit card that deducts money directly from their bank account. That way, they can adjust to the responsibility of carrying a card and not buying more than they can afford. Then, you can help them transition to credit card.
Here are some options:
Secured credit card
A secured credit card limits how much you can charge based on how much you deposit with the card issuer. You will still be responsible for paying a portion of the balance each month.
Service station or gas card
When a minor starts driving, consider helping them get them their first gas credit card, which provides revolving credit. More likely than not, the card will have to be in your name. Many gas stations now have mini-marts, so they may be able to make small purchases beyond gas.
Low-limit credit card
An ideal credit card for a new credit card user will have a low limit such as $500 to help the user avoid over spending. A new credit card user may not fully understand how difficult it would be to pay off a large balance that accrues credit. Starting with a lower limit will provide lesson in how credit cards work.
Emergency-use credit card
Consider getting a family “emergency card” in your name but with your child listed as an authorized user. This is a card that could be safely stored and used on in case of an emergency.
Researching the Best Credit Cards
You can ask the child to research credit cards and discuss them with you. They can learn to evaluate rewards and analyze rankings. You can ensure they know they importance of understanding all the terms and how they compare.
Make sure they understand how credit card interest rates work. Most kids do not have a concept of how quickly compound interest can double a credit card balance or how a lower credit score can affect the total cost of borrowing.
The Financial Finish Line
Consider establishing a deadline, after which they will handle their credit affairs independently. Otherwise, they may become overly dependent on you as a source of financial stability. For example, you may want to cut credit ties with your child when they turn 21.
How Old Should Kids Be for a Credit Card?
Kids can be added as authorized users on some credit cards including the Chase Freedom Unlimited with no published age limit. Other cards like the Blue Cash Everyday from American Express have a minimum age of 13 to be added as an authorized user. The minimum age to be issued a stand-alone credit card is 21.
What Are Good Credit Card Alternatives for a Child?
A debit card is a great way to start teaching your child how to manage their budget and avoid overspending. Some apps, like Greenlight, include parental controls that make it easy to track your teen's spending. If you want your kids to have access to money you can track, but don't want them to have a full bank account, then a product like Apple Cash may be a good choice.
How Do I Know My Child Is Ready for a Credit Card?
Kids who seem to understand wants versus needs and consistently have more money coming in than going out every month may be ready for a credit card.
Can Adding My Child as an Authorized User Hurt My Credit?
If you add your child as an authorized user on one of your credit cards and they use that credit irresponsibly by racking up a high balance (raising your utilization percentage) or failing to pay at least the minimum monthly payment, then your credit can go down. You can prevent this by setting up auto-pay on the monthly minimum and keeping track of the balance on the card.
The Bottom Line
A credit card is a financial tool that can be used to build credit and establish a healthy credit score. Helping kids learn to use a credit card wisely can help them with their long-term finances. Ensure children who are using credit understand the benefits of using it responsibly and the downsides of using it irresponsibly.