Why give a minor a card with a high interest rate? It can help them develop good money habits right from the beginning. Consider what could happen if they don’t. Credit card default is a trap many young adults fall into and may even require rescue from their parents.
Credit cards make it easy to purchase now and pay later. This has led to a flurry of 20-somethings who are maxed out. Teaching your children credit skills is possible, especially if you do it while they are still living with you. It is important to consider the benefits and drawbacks of giving your child a card. Also, think about when it would be most beneficial for you. If you’re convinced now is the right time, here’s what you should do.
Building Credit Early
Parents often help their children obtain their first credit card to build credit. Although building a credit history is an important step, there are more important things. In calculating a credit score, it is only 15% that a person has used credit for. Their payment history is far more important (35%), specifically how frequently they have paid their bills on time. 1
One of the best ways to help your teen build good credit is to add them as authorized users to your credit card. This will allow them to make regular payments and have a low usage percentage. You are still responsible for their use. Talk to your teenager before adding them as authorized users.
Teach them why good credit is important.
Talk to your teenager about how much they can save on a home or car if they have good credit. Begin by helping them choose their dream car. Next, have them choose their dream car. The difference in monthly payments for someone with a credit score of 740+ and a high-interest rate versus someone with a credit score of 580 or less will be displayed to them. Ask them to pay particular attention to the difference in monthly payments for someone with worse credit.
A $250/month car payment can make the difference between a Toyota 3-year-old and a Saturn 14 years old. If they don’t have good credit, a predatory lender will allow them to buy a lot on a buy-here, pay-here basis.
Bad credit can prevent you from getting a job or even a place to call home. Bad credit can prevent you from getting a job or a place to live. Teens who are financially educated will be more inclined to follow established rules.
Instilling Healthy Habits
It’s a good idea to teach your children how to spend responsibly and to have a positive attitude about credit cards. Most people who are overwhelmed by debt have made one purchase. Your children will be better off if you educate them daily about the differences between wants and needs and immediate gratification versus deferred ones.
Before you add your child to your card for authorized use, meet with them and discuss the guidelines. You might agree to go over your child’s monthly purchases and agree that they will pay the entire bill unless you agree otherwise.
Avoiding Impulse Purchases
Discussing the reasons behind your children’s monthly purchases can help them understand the impulse thinking that can lead to people spending more than they can afford. You can also help your children avoid high credit scores by ensuring they pay their monthly charges on time.
Safety net
While we want our children to have good credit habits, it is not something that they will do. However, making mistakes and learning from them is part of growing up. This learning opportunity can remain on a credit score for many years. 3
You can also give your children a safety net by getting them their first credit card while they live with you. You can keep an eye on them and ensure they don’t steal their money.
Best Credit Cards For Kids
High school is the best time to get a card for your kids. But instead of getting a credit card, you can give them a debit card that takes money from their bank account. They’ll be able to manage a card, whether they get a weekly allowance or a salary from their first job. You can then move on to an actual credit card. There are other options than making them an authorized user in one of your accounts.
Secured credit card
A secured credit card is an option for children. This limits the amount they can charge depending on how much you deposit with card issuers.
Service station or gas card
Consider getting your child a gas card when they start driving. The card must be registered in your name. A gas card is enough to allow them to start with credit, but not to the point of committing to long-term debt. A lot of gas stations have mini-marts. This allows them to make smaller purchases, but they will still need to budget and account.
Credit card with a low limit
Consider getting your child a credit or debit card with their high school diploma. The credit card should have a lower limit (maximum $500) and an attractive interest rate.
Credit card for emergency use
Consider getting a family emergency card in your name, with your child as the authorized user. It is an emergency card you can keep in your wallet for a real emergency.
How to Find the Best Credit Cards
Discuss the options with your child when it comes time to choose a card. Many websites offer information about credit cards and their benefits, including Investopedia credit card ratings. This also includes ratings for cards for students. Your child should read and comprehend all terms of each card.
Particularly, ensure your child is familiar with credit card interest rates. Many adults and children need to learn how fast compound interest doubles a credit card account or how a lower score impacts future borrowing costs. Spend some time on the internet reading about these topics to help your kids understand. It should be a requirement for credit cards. You might also learn something.
Teaching by (Bad).
Tell your children about times when you used credit cards responsibly. This will help them to understand how to do it better. Tell your children how you got into debt. Share with them how it felt at the time. Finally, tell them how difficult it was to get out.
The Financial Finish Line
If you are like most parents, your ultimate goal should be to help your children “launch” financially once and for all. You’ll need to set a goal and let your kids manage their credit. You can make them dependent on you for financial stability, sometimes for many decades.
The ideal age to end credit ties with your child, in general, is 21- 22 years of age. You should inform your child about the plan at least one year in advance so they can take necessary actions. Thanks to all your efforts, they should be able to manage their credit independently.
What age should a child be to apply for a credit card?
Children can be added to credit cards with no age limit, including Chase Freedom Unlimited.4 Others, like the Blue Cash Everyday card from American Express, have a minimum age requirement of 13.5. Credit Card Accountability, Responsibility, and Disclosure Act of 2009 established that 21 is the minimum age for a credit card.6
What are some good credit card alternatives for children?
A debit card can be a great way for your child to learn how to manage their money and not overspend. A data-component=”link” data-ordinal=”1″ data-source=” inline link” data type=”internal link”>debit card is a great way to teach your child how to manage their budget and avoid overspending.
How can I tell if my child is ready for a credit card?
Children who understand their wants and needs and have more money coming in than they spend each month may be ready to apply for a credit card.
Is it possible to add my child as an authorized user to my credit?
Your credit score can be affected if you add your child to one of your credit card accounts and they misuse that credit by creating a high utilization percentage or failing to make the minimum monthly payment. This can be prevented by setting up auto-pay for the minimum monthly payment and keeping track of the balance.
The bottom line
A high credit score can help you build wealth in the future. Your kids can benefit from your helping them understand the importance of having a high credit score. This is easiest by adding them to your card’s authorized users list. Before signing up, make sure they are aware of the risks associated with credit recklessly. Also, help them to research card terms and fees.
