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It may sound strange to let children use credit cards, especially if they're still in the single digits. But when approached correctly, it can be a terrific idea.
Credit cards are no different from any other tool. Lessons and rules are required. You wouldn't hand your child a hammer without instructions or walk away and hope for the best. You'd explain what it's for, show them how to build something fabulous, then monitor the situation carefully, particularly in the beginning. You can apply this same concept to credit cards. A well-prepped child can use a credit card to borrow and repay money safely while creating a valuable credit history.
If you're wondering what a child could possibly use a credit card for, read on.
When to Get Your Kids a Credit Card
If you're deciding when to get your child a credit card, current legal guidelines can help. To sign a credit card contract, a person has to be at least 18 years old, ruling out younger kids who want their own card. Instead, you can make a minor child an authorized user on your personal account. Many issuers (such as Capital One and Chase) have no age restrictions, though some require authorized users to be teenagers.
When you authorize your child to use your account, a card imprinted with his or her name will be issued. Your child then has the right to charge with it. If that makes you nervous (understandable, especially if you have a high limit), you may ask the issuer to set a lower credit line for the user. As the account owner, you maintain total control. You can and should impose rules for access. For example:
- Preteens may not carry the card but can use it under your direct supervision.
- Young teens may have access to the card under certain circumstances.
- Older teens may carry the card in their wallets or upload the account information to their mobile devices.
If you don't want the card to be used at specific places or over a certain amount, say so. In fact, write it down. This way you can avoid "But you said…" conversations later.
When Your Child Should Use Their Credit Card
Start by explaining that a credit card is a payment tool, and each time they use it they are borrowing money from the credit card issuer. Because you're the owner, you will get the bill. If you pay for everything that was charged in that billing cycle by the due date, it won't cost anything more than the purchase price. But if you pay partially, interest will be added to the remaining balance. Discuss the danger of carried-over debt and how it can quickly—and expensively—grow.
After that, set the rules for what your child may charge. Some common charges parents allow—usually with limits—include:
- tutoring and coaching services
- a small indulgence a week or month
- clothes and accessories
- academic and hobby supplies
- food and beverages outside of school
- movies, concerts and sporting events
- swimming pool and recreation center entry fees
- dance and prom tickets
- gas for the car
- pet care (if your child has assumed responsibility)
- electronic transactions (such as Venmo)
It can also be smart for a child who is frequently out and about to have a credit card as protection against emergencies. For example, you may want to add a car sharing app to your child's phone, but insist that they use it only when necessary.
Teach Your Kids to Use Credit Cards Responsibly
Show your child how you check the account's activity on your phone or on the creditor's website. This will drive home the fact that there really are no secrets. When your child uses the card, it's there in black and white.
Also crucial: Make sure your child keeps the credit card safe. It should never be used by a friend or left where it could be stolen. If it does disappear, your child must notify you immediately.
Emphasize the importance of tracking spending and ensuring you can pay off the balance each month. You may expect your child to repay you for some or all of their charges, so be clear about it from the beginning. The money might have to come from an allowance, savings, financial gifts or a job. As the credit card owner, you will collect what's due and deal with the debt, so it is crucial that you follow through on this task.
Remember, you are demonstrating responsibility. If you allow your child to rack up charges that you end up paying, you're teaching poor money and credit habits. On the other hand, if you are strict about this process, you are showing the seriousness of the situation. Everything borrowed must be repaid, on time and in full. If not, there may be consequences that you can impose, such as:
- Extra chores
- Added fees
- Removing the card temporarily
- Revoking the card permanently if it happens more than once
If you're uneasy about letting your child piggyback on your credit card, a prepaid card may be preferable. These are debit cards that can be filled with funds, and since they are usually connected to such payment networks as Visa, Mastercard and American Express, your child is free to use the card anywhere the network is accepted (if you give permission). With each use, the balance declines. When the card is empty, it can't be used again until more money is added. Since no borrowing is involved, debt is not possible. Risk is minimized, though debit cards won't help your child create a credit history. Consider them credit card training wheels.
Early Lessons Help You and Your Child
A credit card can give your child an exciting sense of freedom and the ability to make safe and secure transactions. When it's kept in good standing, it will boost his or her credit scores, which will help when it comes time to get a credit product in his or her name, rent an apartment, or do anything else that requires an attractive credit report.
Don't be afraid to start credit card school, which includes access to a card, as soon as your child seems up to the task. When your child understands how these accounts work, he or she will not only feel comfortable and capable, but will be less apt to come to you to for a financial bail out later on in life.