A credit card for your kid? Pshaw. But wait – don’t shake your head at me. There are legit reasons to give your kid plastic. Reasons that could make your offspring a savvy spender, increasing the odds they’ll be able to support you in your geezer days.
Nip abuse in the bud
Some 60 percent of Americans with credit cards carry a balance to the average tune of $7,300, said Matt Schulz of CreditCards.com. Think their parents taught them about credit cards? Giving your child a credit card is scary, but letting them dive into credit unsupervised is even scarier. I’m talking “Blair Witch Project” scary.
“I’m all for teaching kids about credit as young as possible,” says Beverly Harzog, a writer for Credit.com. “If they’re ready.” Certainly before they shove off for college and some may be ready – gasp – as young as middle school.
So trust your ability to make a credit card an educational tool (if I may get all didactic on you).
When shopping, explain how the card works and when the bill arrives, explain it again. Due date? Check. Payment options check? Check. Interest rate? Check. Grab a calculator and show them what an interest rate is – in real dollars. Talk about what happens if you don’t pay off the balance in full and make a rule to always do so.
“There have to be boundaries,” said Linsey Knerl of 1099Mom, who introduced her 9-year-old daughter to plastic through low-balance store gift cards. “There has to be conversation. There has to be follow up.”
Let them piggy back
After your kid shows signs of financial stability, consider helping them build their credit history. Your options include:
Pre-paid gift cards – These popular cards from Visa or MasterCard almost always have maintenance fees, so use them carefully.
Pre-paid credit card – This type of card won’t build credit, but the upside is that a child as young as 13 can get one.
Secured credit card – Put $500 in a bank account to secure the credit limit, then if the bill doesn’t get paid, the bank uses the deposit to cover it. Make sure the issuer reports the payments to the three major bureaus, Experian, TransUnion, and Equifax.
Debit card – Set your kid up with a debit card before graduating to credit. Tie it to their bank account and set up notifications so you can see where your child is charging. If they can’t handle debit, forget about credit for now. The downside is that a debit card does not establish credit history.
Authorized user – It’s still your account and your responsibility to pay, but as an authorized user your kid can make charges on your card. Be specific about what items you are allowing them to charge and remove them immediately if they screw up. Authorized users build some credit history, but not as much as a co-signer.
Tip: Consider credit from a security standpoint, Knerl suggests. “Would you freak out if you lost your checkbook? Imagine you’ve got a 15-year-old running around with your credit card. And kids never lose anything right?”
Co-signer – At 21, your grown child can get a credit card as long as you sign off on it (or if they can show a stable source of income). On their own, your child might only qualify for a secured credit card with a low limit and high interest rate. But think twice before you put your own credit history on the line, because if junior goes on a shopping spree, you are legally both on the hook to pay it off.
“The earlier you start, the easier it is to get credit later on,” said Jeanine Skowronski, a writer at TheStreet.com. “When I was 18 my mom co-signed for me. Then when I got to the point in life when I was trying to buy a car, it was a lot easier because I had a credit history.”
When the time comes, sort through credit offers being sent to your kid and help them evaluate their options. If your kid heads to college without some experience with plastic, the opportunity is ripe for epic fail.
“So many students go to college and don’t have a handle on why they need to pay the bill in full, how this can snowball into a real albatross around their neck when they graduate,” said Laura Rowley of DailyFinance. With tight boundaries that you set, failure may come, but in small doses. Aside from staying out of debt, more and more employers are checking applicants’ credit history, meaning solid credit lessons early on could improve chances of employment down the road.
In an emergency, having a credit card could help your kid. As long as you and s/he have the same definition of emergency.
Julia Scott blogs about saving money on everyday expenses like groceries, gasoline, and gifts at BargainBabe.com.