Kids and credit cards may not seem like a match made in heaven, but in many ways starting you children on the path to responsible credit should start when they are young. Teaching your kids about the benefits and dangers of credit cards will go a long way toward their financial stability in the future. Here’s why giving your child their first credit card might not be such a crazy idea.
- Managing credit teaches financial literacy – This knowledge is not ingrained in American children, and it isn’t often taught in school either. Using a credit card will teach your children to budget, manage debt and track spending. With a cash allowance, kids may not remember or care where their money goes each month, but a credit card comes with a paper (or electronic) trail that allow kids to see what they’re spending their money on.
- Your kids can build credit now – Someday your kids will need to qualify for car loans, mortgages and credit cards and if they apply for loans without any credit, they may be denied or face steep interest rates. Making your kids authorized users on your credit card accounts will help them build credit with supervision.
- Prepare teens for emergencies – Once teenagers start driving, their first credit card can help them out in emergencies. Whether they need a car repair, a tank of gas or a place to stay, you’ll feel better knowing they’re prepared.
Teaching your children to use their first credit card
Teaching your kid to use their first credit card responsibly is a step-by-step process. Move from one step to the next only when your kids have proven that they are ready. While it’s never too early to start teaching your kids about managing their finances, transitioning to credit cards will depend on their ages and maturity level. Here’s an overview of the transition process, starting from elementary school age.
Give your young children an allowance
You can start teaching your children about saving, spending and budgeting when they are very young. Give them a cash allowance and have them keep half for spending and half for savings. You could also have them set aside a small portion for tithing or donating to a charity they care about. Their savings can be put in a bank account or a piggy bank. Encourage your kids to save up for something big. Young children will feel a huge sense of accomplishment when they plan and budget for a large item with their own money.
Teach your children to use a debit card
Once your kids understand the ins and outs of budgeting and saving, you can start putting their allowance, birthday money and other savings into a joint bank account. By the time they are in middle school, they should be ready for debit card that they can use to pay for items that they need or want. Teach kids about making safe online purchases and keeping their card and PIN number secure. A debit card will help your kids get used to carrying around a card and not buying what they can’t afford to pay for. To avoid overdraft fees on the account, be sure to open an account that offers overdraft protection.
Make your kids authorized users on your credit card account
By the time your kids are in high school, they will hopefully be well on their way to a healthy relationship with money and credit cards. When you think they’re ready, the next step is to make them an authorized user on your account. It’s important to note that if your kids overspend or can’t pay you for their purchases, you will be legally responsible to pay the bill. Many card issuers will let you set up an alert if your authorized users spend past a certain threshold.
Making your child an authorized user will also allow you to transfer your credit history for that card to your child, which will help them to build credit faster.
Your child’s very own credit card
By the time your children turn 18, they will be ready to take the leap and get their first credit cards on their own. A first credit card should have a low interest rate, no annual fee, and ideally, a very low credit limit. Let your children research credit cards themselves, and then discuss their choices with you before deciding which card to apply for.
By taking small steps with your children to help them learn about credit and credit cards, you will teach them a valuable lesson – not only about the importance of budgeting and spending wisely, but also about the importance of a good credit score and how it affects future borrowing. No matter how old your child is, they’re never too young to start learning the importance of responsible credit card use.
Do you think kids should use debit or credit cards? Why or why not? Share your thoughts with us in the comments section.