Why get a minor a credit card? It can help them learn healthy money habits from the start. Look at what can happen if you don’t: One trap that many young adults seem to fall into—and that sometimes might even require a rescue from their mom or dad—is credit card debt.
The ease with which credit cards allow people to buy now and pay 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 that 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.
- Adding your teen as an authorized user on one of your accounts is an excellent way to help them start out with good credit.
- Parents should explain why good credit is important with real-life examples.
- Parents should have their kids do their own research to learn about different credit card terms and especially how interest rates work.
Building Credit Early
Many parents help their children get a first credit card so they can build credit. Though 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—or have not—paid their bills on time. Don't get your child their own credit card if they cannot handle paying at least the monthly minimum on time.
Adding a child as an authorized user to one of your credit cards that has a long history of 100% on-time payments with a low utilization percentage (meaning a high limit and a low balance) is one of the easiest ways to help your teen have good or excellent credit by the time they are 18. Keep in mind that their usage is still your responsibility. Before adding your teen as an authorized user, have a talk with them.
If you or they are concerned about the potential for reckless spending, you can have them put a small recurring monthly bill like Spotify or their favorite YouTube star's Patreon on the card. First, though, have them agree not to be given the physical card or numbers until you come to the mutual agreement that they're ready for it.
They can't overspend on a card they can't use, and they'll still get the benefits of a long credit history with low utilization and on-time payment history. Help them set up a monthly auto-draft from their bank account that pays off the credit card balance every month to help them build that habit. If they can't manage to keep $10 to $30 in their bank account to cover the auto-pay on their subscription, then they aren't ready to have the card.
Teach Them Why Good Credit Is Important
Sit down with your teen and show them how much money they can save on a house or a car if they have excellent credit versus poor credit. Start by having them pick out their dream car. Then plug in the purchase price of that car in an auto loan calculator like the one below. Show them 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. Have them pay special attention to how much more the monthly payments cost on the same vehicle when someone has worse credit.
If someone can afford a $250/month car payment then having good credit may be the difference between driving a three-year-old Toyota and a 14-year-old Saturn purchased from a predatory lender on a buy here, pay here lot if they have bad credit.
In addition to saving money on loans, bad credit can stop you from getting a job or even a place to live. Teens who develop financial literacy are more likely to want to follow established rules than if they never have the consequences explained to them.
Instilling Healthy Habits
Teaching good spending habits and a healthy mindset around credit cards are the two best reasons 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 daily about the difference between needs and wants, between immediate gratification and the deferred variety, will go a long way toward keeping them out of financial trouble.
Before you put your child on your card as an authorized user, sit down with them and agree on guidelines in advance. Some points might be going over their purchases together each month; agreeing 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 specified time.
Avoiding Impulse Purchases
Reviewing your children’s monthly purchases with them and discussing the rationale behind each one 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 for the entire month’s charges, you’ll help them 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 that 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 that the dog doesn’t eat their payment, that they don’t get duped into wasteful monthly charges, and that 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. 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.
Service station or gas card
When 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 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 that they offer, including Investopedia’s own credit card ratings, which include ratings of cards for students. Make sure that your child reads and understands all of 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 quickly compound interest can double a credit card balance or how a lower credit score affects the future costs 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) when 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 that they can take any actions that they need to. Thanks to your earlier efforts, they should be ready to successfully manage credit on their own.
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 Credit Card Accountability, Responsibility, and Disclosure Act of 2009 made 21 the minimum age to be issued a stand-alone credit card.
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 set up with parental controls under a family account 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 good credit score is a great tool that can be used to build wealth later on in life. Helping your kids understand the reason to have a good credit score and helping them to build a credit score can give them a significant leg up. Adding them as an authorized user on one of your cards is the easiest way to do this. Make sure they understand the downsides of using credit recklessly and help them research different card options, terms, and fees before signing them up for one.