One of the ways you can teach responsible spending and saving habits to your children is by getting your kid a credit card.
Support for financial education in schools is growing, but the reality is that many young people are still on their own when it comes to learning about money. Parents were the most-cited resource for financial education in a 2019 survey from Country Financial, an insurance and financial services company.
Done right, getting your kid a credit card can be a way to pass on the good financial habits you’ve learned yourself. Here’s what experts say about when to get your kid a credit card, whether to add them as authorized users, and how to ensure they use their cards responsibly.
When Can Your Child Get a Credit Card?
In order to be the sole card owner of any account, you have to be 18 years old.
But many experts recommend exposing kids to credit cards earlier than that. Your child may be ready to learn sooner than you think. Developmentally, kids can start to understand basic money concepts as young as age 3, and many children develop spending and saving habits by age 7, according to a study by Purdue University.
Some experts recommend adding teens to credit card accounts as authorized users, which can give them a credit history and help establish good habits. Before that, you can get them a debit card connected to a bank account.
If you’re worried about your child being responsible, add them as an authorized user without giving them their own card. They’ll still build credit even if they never make a purchase.
“Once your kids are getting close to 18, you can have those discussions with them about what their first credit card should be, because there are a lot of options,” says Nathan Grant, an industry analyst at Credit Card Insider.
Other experts suggest paying your children for chores, and putting that money on a pre-paid credit card. “When you put money on a credit card, they can understand in today’s society how cards work,” says Gina McKague, financial planner and founder of McKague Financial. McKague got credit cards for her own children when they turned 16.
Benefits of Making Your Child an Authorized User
While adding your child as an authorized user might feel a lot like putting them into the driver’s seat for the first time, it can actually be pretty safe. Here are some benefits, with a few cautions from our experts.
- It builds their credit score: “If the parents are responsible, they have good credit standing, and they pay their bills on-time, it’s often a good idea to add a child on as a user,” says McKague. You don’t even have to give them the card — you can keep it in a drawer. “As long as they’re on that account they’re getting all the positive credit reporting.” That’s important, Grant notes, because “there’s things you don’t think about that credit can impact.” Renting an apartment, for instance, or getting a good insurance rate — both will be easier when your kid has a good credit score. However, Grant cautions that “if you make your child an authorized user and you’re not being responsible with the card, that’s going to negatively impact them right out the gate.”
- It can teach them the value of money: It’s important to help kids understand that the card does represent a value and “not just free will to swipe it like a samurai sword,” says McKague. A credit card is a great tool to use while teaching budgeting — within the right parameters. Before giving your child a credit card, explain that overspending leads to interest charges. Go over statement balances together each month, noting line items such as interest and credit statements. Then, apply your child’s allowance to the amount due. If there is leftover allowance money after paying the card’s bill, you have some options. Maybe give your child the option to buy a gift card, or even open an investment account.
- It’s safer than giving them cash: As your child spends more time away from you with friends or at school, they’ll be more likely to need spending money. Cash can be lost or stolen, while charges on a credit card can be removed if the card is reported missing.
Teaching Kids About Smart Credit Card Use
There are a few guidelines you’ll want to follow to make sure your kid understands responsible credit use, according to experts.
“The main thing you want to teach kids is to pay your statement balance in full every month,” says Grant. “That way you’re not only showing good activity to the credit bureaus and building good credit scores, but you’re not paying interest.”
You should also discuss the factors that affect a person’s credit score. Kids should understand that it’s healthy to always make on-time and in-full payments and to keep your balance low relative to your credit limit. Experts suggest a debt to income ratio of no more than 30%, meaning don’t spend more than 30% of your allotted credit.
Finally, create a budget and a couple of savings goals with your child. They should understand that whatever they don’t spend now, they can save for later. They should also understand that money is earned, so tie at least a portion of their allowance to chores they are responsible for.
Best Credit Cards for Teens
When your teen reaches age 18 and is old enough to apply for their own credit card, consider the following options.
Journey Student Rewards from Capital One
The Journey Student Rewards Card from Capital One is an unsecured card option for a teen with no credit history. It doesn’t come with an annual fee, and users can earn 1% cash back, which gets boosted to 1.25% cash back when they pay on time. There are no foreign transaction fees for students planning to study abroad, and there’s an automatic credit line review every six months so teens could potentially get access to a higher limit, which will help their credit score over time. But this card has a 26.99% variable APR, so be sure to teach your teen to make their payments in-full.
Discover It Student Cash Back
The Discover it® Student Cash Back Card is one of the best student credit cards available. It offers 5% back on rotating bonus categories, which often include retailers like Amazon.com or places like restaurants and grocery stores. Teens can also earn 1% back on all other purchases, and Discover will match the cash back earnings from their first year as a cardholder. Rewards can be redeemed in any amount, there’s no annual fee, and 6 months 0% APR on new purchases (12.99%-21.99% variable APR thereafter).
If your teen is still under 18, consider applying for one of the best cash back credit cards and adding them as an authorized user.