As a young adult, having a good credit history is important, not only for buying things on credit but also for living necessities. Employers, lenders, insurers, landlords and utility companies will check credit scores to evaluate how you can manage financial responsibility. A low credit score could land you higher fees and insurance rates or even prevent you from getting a loan or being able to rent an apartment.
This is why some parents are getting a head start at teaching their children credit literacy and the proper ways to manage credit cards for kids.
Can a child get a credit card?
Typically, your child has to be 18 years old with a stable income to get a credit card on their own. But, depending on age, credit card issuers will allow parents to add children onto their cards as authorized users so they can build a credit history.
Adding a child to your credit card as an authorized user is an easy process, but before doing so, you’ll need a plan. Some credit card issuers don’t have an age limit, and others limit the minor’s age to 13. Additionally, starting too early could cause more harm than good, and giving your child access to your credit card without proper education could backfire. If you allow your child to use the card and they overspend, you and your credit will be liable.
If adding your child as an authorized user doesn’t sound like the best solution for you, here are a few other ways kids can get a chance to manage credit and get practice borrowing money:
- Have them apply for a secure credit card or cosign for a credit card: If your teen is old enough, you can help them start small with a secured credit card. These cards look like credit cards (merchants won’t know it’s a secured card), but they function a bit differently. You deposit cash into the card, usually $200 to $500, depending on your credit history (or the cosigner’s credit history). Typically, that deposit determines the credit limit on the card. All transactions get reported to the credit bureaus (usually all three bureaus, depending on the card), and your teen can start building credit on their own. If you are willing to take on responsibility for your teen’s credit, you can cosign for a card. However, this gives them access to a higher credit limit, which means more freedom to spend. Visit our secured credit card reviews to see if one of these cards works for you and your child.
- Sign up for a prepaid debit card on an account with parental controls: While a prepaid debit card won’t build credit, it can teach your child how to manage money without using cash. It can also teach your child how to save by giving them an allowance. You can have money automatically deposited into their account. Some teen debit card platforms like Greenlight, Famzoo and Current are designed for parents who want their kids/teens to get a jumpstart on managing their accounts. These types of accounts let you see what your kids are spending on and allow you to block access to specific merchants and categories. Some accounts even allow you to create spending limits, track chores, manage an allowance, create IOUs and teach your child budgeting habits.
Tips for teaching credit literacy
Teaching kids about credit early can provide an excellent financial foundation. Helping them to recognize and avoid common credit card mistakes is crucial if you’re going to get them started early with credit cards or teach them the concept of borrowed money.
- Educate kids on what credit reports and scores are: Talk about what credit reports and scores are, why they are important, what kind of information is on a report and how scores are calculated. It’s so important for them to know who the three main credit bureaus are and what metrics go into determining a credit score. This information will give them a better understanding of why managing their credit is important.Tip: Since credit reports and scores can be confusing for even some adults, you might want to explain credit in a way children can understand. We recommend comparing credit to school. Credit reports are a student’s credit report card and credit scores are a student’s individual grades. Doing this could help your child get a stronger grasp of the concept, as you’re comparing it to something they’re familiar with.
- Explain how to use credit cards properly: Talk to them about credit card annual percentage rates (APR) and avoid interest rates by paying the balance in full before the due date. Teach them not to spend more than they can afford to pay each month, even though their credit balance may be higher. And detail what could happen if they overspend or allow a balance to carry over each month. If you teach them how to avoid interest rates and credit card fees and what can happen if they overspend, they can learn while they’re living with you and while you can keep a close eye on their spending.Tip: A good way to do this before handing over a credit card is to teach your child how to successfully borrow money. Give your child $2 this week to buy a candy. Explain to them that they need to pay back the $2 in two weeks using their allowance or money they saved up. Remind them as the date gets closer, then ask them for the money on the “due date.” If they’re able to pay you back on time and in full, increase the amount they borrow next time (try $10), then hand over the credit card when you feel they’re ready. If they’re unable to pay you back on time and in full, take it as a sign that they’re not ready for credit, and try practicing borrowing again in a couple weeks or months.
- Teach them responsible credit card use: The trick to avoiding falling into debt is to use credit responsibly. This means the cardholder is paying their bill on time and only using their card for purchases they know they can pay off. You should also explain to your children that credit cards can be used in emergencies, but make sure you define what an emergency is. If your kid is in college, explain that books may not be an emergency expense, but the need to fix their car so they can get to class would be.
- Teach them how to budget and track spending using online tools: This is the perfect opportunity to teach your child how to manage financial accounts using the online tools that come with the cards. Go over the importance of strong cybersecurity habits, like choosing a strong password to keep their account secure. Show them how to manage their money using the platform. If you’re using an account that has parental controls, be sure to set it up correctly and communicate with your child so both of you are on the same page on what stores and categories will be okay to shop at, and what monetary allowances will be available. It’s important to set boundaries early. You can also opt to teach them traditional budgeting through excel or even using a pen and paper, but the online tools offered by the card issuer will likely be the easiest for your child to understand since they relate to their card and are easier to access.
- Check in regularly and work on accounts together: Whether your child is an authorized user or has a secured credit card, a prepaid debit card or a teen debit card account, talk with them regularly about their account and finances in general. Mobile apps make it easy to keep an eye on things, but parents and children should also sit down and talk about how things are going, discuss any questions your child may have about finances, go through their weekly/monthly transactions and budget together.
Although not all children can get (or are ready to get) a credit card, there are still ways for you to teach credit literacy. Follow these smart steps to get your child or teen a head start on credit literacy and provide them with a good financial foundation on how to manage a budget, use credit and debit cards properly and understand how credit works. It will set them up for future success in avoiding credit card debt and successfully managing their finances.