Every parent knows they need to provide the basics: food on the table, roof overhead, and clothes on the back. What sometimes falls through the cracks, though, is instilling good financial habits — especially when it comes to credit.
Only a bit more than half of parents, according to a recent T. Rowe Price study, believe that it is important for kids to own a credit card to learn about managing money. Yet the way people deal with credit can have profound impact on their lives. When it comes time to buy big-ticket items like cars and homes, lower credit scores mean higher interest payments, if people can get a loan at all. And credit history makes up 15% of a credit score — the longer they’ve dealt with credit, all else being equal, the better borrower banks believe them to be.
It’s important to at least start a conversation about responsible spending, and do so well before your kids head off to college. But should you actually get your child a credit card? And if so, what’s the right age? I turned to some credit experts for guidance, asking them to tackle a few key questions:
Is This a Good Idea?
Robert Harrow, an analyst at ValuePenguin.com, started considering the matter after his niece was born last year. Rather than clothes, which she’d soon outgrow, or space-consuming gizmos, he wondered: Why not bestow a credit history? “I figured that if I were to make her an authorized user on my credit card, I would be setting her up for life,” Harrow says. “I’d be the best uncle in the world.”
Harrow ultimately decided against the idea, saying it was simply too soon. “If you are an authorized user on an account, the age of that account appears on your credit history — regardless of when the authorized user was added,” Harrow says. So if you have an account of long standing, adding your kid as a user would do just as much good if you wait till he or she is in high school.
But some parents might have other concerns about teaching kids to spend now, pay later. Start by talking to your children about the value of money, as well as spending and budgeting habits, says Scott Moffitt, president of Loveland, Ohio-based Summit Financial Group. He recommends you start talking about credit cards only after your kids have demonstrated maturity and responsibility in other areas of life — and even then, with a strong warning about the consequences of overindulging. “You got to have the conversation with kids early to help them understand why getting into prolonged credit card debt is bad,” he says.
How Should You Set it Up?
Even if you do want to hand your kid the keys to your wallet, what’s the best route to go? Thanks to 2009’s CARD Act a child must be over 21 or have steady income to qualify for his or her own card. So if you want to get your kid started sooner, you have two options: Make your child an authorized user on your own card, or co-sign the application for a card.
“It’s probably much easier to add a child as an authorized user compared to getting them a secured credit card, which would require a full application process, security deposit and the parent co-signing if the child was over 13 and younger than 21,” says CreditCardForum.com’s Ben Woolsey.
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Going the authorized user route also allows your kid to benefit from your credit history, as long as your issuer reports authorized users to the credit bureaus. (Some don’t.) “You essentially allow them to benefit from the performance of the account without saddling them with responsibility for the debt,” says credit expert John Ulzheimer. “And if something goes wrong and the card goes delinquent or becomes too heavily leveraged, all you have to do is remove the authorized user’s name from the account and it will be removed from their credit reports. It’s like having a credit card with training wheels.”
But there’s a clear downside: You’re now on the hook for your kid’s purchases. No matter what you and your child have agreed between you in terms of who pays for what, the issuer will hold you, the parent, responsible for anything charged to the card. If your kid runs up big debts, you have no real recourse but to pay them off.
The alternative here is to cosign for a separate card — one that will let your child start to build a credit history from scratch. You’re still on the hook for the bills, however, so some experts recommend using something called a secured card. Either you or your child starts by depositing cash up to the credit limit, as collateral. If your child hits the cap, no more credit, and no more liability for you.
“A secured card is a safer bet — especially if it’s the kid’s own money deposited on the card,” says NerdWallet’s Sean McQuay. Look for a secured card that doesn’t carry an annual fee.
What’s the Right Age?
Once you’ve considered your options, decide when would be the right time to get your child started. Is high school appropriate? Middle school? Should I get my 2-year-old a credit card?
In truth, there’s no single answer; every kid is different. There may be practical considerations, however. Many banks don’t allow you to add a young child as an authorized user; Discover, for instance, requires authorized users to be at least 15 years old. (On the other hand, Citibank doesn’t have an age restriction.) Check with your issuer to see if your kid is old enough.
More important, there’s emotional maturity. “You should talk about where that money is coming from,” says Moffitt, whether it’s from a regular allowance, an after-school job, or you. Once you feel like your child is ready for a card, Moffitt says you should say what you expect the card to be used for (gas for the car, for instance), and then monitor the spending closely online.