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While you certainly don't want your child to go wild with your Mastercard, teaching kids the basics of credit cards early on, and possibly even giving them access to one, is all part of helping them become financially responsible as they get older. Here's what your kids should know about plastic before you set them loose.
What Should My Kids Know About Using Credit Cards?
While credit cards sometimes get a bad rap, usually from stories of folks who become mired in high interest credit card debt, they are actually useful financial tools. When used responsibly, they help you establish and build credit, which makes it easier to qualify for other forms of loans and credit in the future, such as a car loan or mortgage.
Your children may not be prepared to get their own credit card until college, but it's never too early to start teaching them about the ins and outs of credit.
Benefits of Credit Cards
- Credit cards are often the first way a person begins to establish and build credit history. Whenever you open a credit card, it goes on your credit report, which also tracks your balance and repayment history. This is important because your credit report will be used by lenders and others to determine whether you are financially responsible.
- When a credit card user makes responsible choices, such as keeping their credit utilization rate low and paying bills on time, this can help build a good credit history and high credit scores. These are typically necessary to qualify for other means of credit later in life, such as a car loan, mortgage or even financing for a smartphone. Credit is also sometimes checked when you apply for a job or an apartment to assess your financial responsibility.
Downsides of Credit Cards
- While your income is a factor in what credit limit you're given, it's still possible to use credit cards to spend more than you can afford to pay off every month. Kids should know that credit cards aren't meant to be a way to purchase what you can't afford and live beyond your means, but rather as a short-term loan for emergencies or credit-building purposes that they must repay as quickly as possible to maintain good credit.
- Credit cards don't lend you money for free. While some do offer 0% introductory rates, they don't last forever; other credit cards have steep interest rates from the start. Kids should learn that interest is the price paid to borrow money, and high interest rates make debt even more expensive and difficult to pay off.
- While smart credit card use can help build and improve your credit, being irresponsible with plastic can tank your credit. Your child should know that if they make late payments, their credit will suffer; and if they default on a debt, it can go to collections and seriously damage their credit for years to come.
When Should I Get My Kid a Credit Card?
Not every teen is prepared for the responsibility and long-term consequences that come with a credit card. The good news is young consumers can't get a credit card on their own until age 18, and not until age 21 unless they can prove they have sufficient income to make payments, according to the Credit CARD Act of 2009.
However, parents can add their minor children as authorized users on their credit card accounts if they feel they're ready. This means the kids will receive a credit card that's linked to their parent's account. Some, but not all, credit card issuers have age minimums for authorized users. For example, Discover requires the child to be at least 15 years old.
Whether your child should get access to a credit card is up to your discretion. What's more important than their actual age is their maturity; in other words, if you think they're ready to be financially responsible and fully understand the long-term consequences of credit card use.
Communication is key. Sit down and talk with your child, and make sure they understand how credit cards work. If you plan to have rules around their credit card usage—for example, allowing use for emergencies only, or perhaps gas purchases—consider whether you think they're capable of following your guidelines. Since they will be an authorized user on your account, you'll see all of their purchases. This means you'll be able to monitor their activity and have a talk (or take away the card) if you determine that they aren't really ready for it.
It's also important to discuss who's in charge of paying the bill. Will it be you, or your child? T. Rowe Price's 2017 Parents, Kids and Money Survey found that 18% of kids ages 8 to 14 have credit cards, and of those, 41% of parents require their kids to pay their own credit card bills.
Which Credit Card Should I Get My Child?
As we mentioned, one option is to add your child as an authorized user on your existing credit card account. Another strategy, if they are 18 or over, is to cosign on a credit card so they can get approved with your help, since most credit cards usually require some amount of established credit history.
One option for those 18 years and older who haven't built any credit yet is a secured credit card. These are intended to serve as a low-risk way to build credit history and require a small deposit that's equal to your credit line. After a certain period of responsible use, the account holder has often built up enough credit to qualify for a standard unsecured credit card, if the card issuer offers one.
Other starter credit cards include unsecured cards intended for those with limited credit history. The interest rates on these cards can be high, so ensure your child doesn't carry a balance if they get a card like this. The goal should be to make purchases they can afford (ideally everyday purchases they'd be making anyway) and pay the bill off quickly, before interest is charged on it.
In addition, there are some alternative credit products to consider, such as Petal. This is a credit card that doesn't require a credit history, but instead uses other factors like financial history to approve applicants.
Start Credit Education Early
Not every young person is ready for the huge responsibility of a credit card, but parents who start educating their children about credit early can help set them up for success later in life. For kids who are ready, there are many options. If they're ready for their own card, check out Experian CreditMatch™ to learn about credit cards ideal for those with a limited credit history.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on May 11, 2019, and has been updated.