It may be reality that your child is going to need a credit card. See what tips we can offer for you
For many parents, choosing the right time to give their child a credit card is a difficult decision. After all, the stakes are high. Getting your child off to a positive start using credit can help them gain financial independence early in their adult lives. On the other hand, if your child establishes a poor credit history early on, it can take years to overcome, increasing the likelihood of their need for financial support into adulthood.
The best time to establish credit for any young consumer varies per family depending on factors such as, the child’s maturity level, financial knowledge, and the family’s finances.
Let’s discuss the positives of children establishing credit. Designating your child as a joint account holder or authorized user on your credit card can help them build a positive credit history (assuming you pay the credit card bills on time - otherwise you could be hurting their credit). Having a longer history of good credit will help your child achieve a good credit score faster, which can significantly help them once they’re ready to establish credit on their own when they go to open their own credit card, get a car loan, or even rent an apartment.
There are tremendous benefits associated with teaching your child how to use credit responsibly before they open their own credit card. Many young adults who open their first independent credit card establish a negative credit history that can take years to put behind them. Note that most negative items stay on a credit report for at least seven years. By giving your child a credit card under your supervision, you can teach them how to responsibly use credit. A great way to get started is by giving your child a credit/debit card with a specific credit limit (say $500), and letting them know that it can only be used for specific purchases. Another alternative is to give your child a card that they can use for whatever they want with the understanding that they’re required to pay off the card themselves using their allowance or after-school job money.
Of course, the biggest risk of giving your child a credit card is the potential for overuse or misuse by your child. If a parent doesn't closely monitor their child's credit card spending, they could be establishing poor habits. As mentioned above, the card should be paid on time or you might actually be hurting your child's credit history.
Understand that if your child charges more than you want them to, as a parent you’ll be responsible for paying those charges. Unless you’re certain you can trust your child’s spending habits, you need to set spending limits in place.
In general, it’s a good idea to wait until your child is in their teens before you allow them to use credit cards because there’s little benefit in establishing credit history prior to that time. Additionally, older children are more inclined to be responsible about spending. Many parents turn credit spending into a learning experience, sitting down with their kids on a monthly basis to review the credit card bill, discuss what's been spent, and talk about how it's going to be paid.
When the time is right, there are several options for getting your child a credit or debit card. Here are a few of our favorites:
- If you want to help your child establish a positive credit history and think your kid is ready for the responsibility, you should add your child as a secondary cardholder to one of your existing credit cards. It's a good idea to sign up for a card that the parent will benefit from, too. We really like the Capital One Cash card. It features a 0% intro APR until February 2013, 1% cash back on all purchases, a 50% bonus on the cash back you earn every year AND $100 Bonus after you spend $500 in the first 3 months. If you'd like to see the other options out there, take a look at NextAdvisor.com's credit card reviews. Keep in mind; you’ll need to keep close tabs on your child's spending with this approach.
- If you'd like to get your child their own pre-paid debit card, BillMyParents® Reloadable Prepaid MasterCard is a smart solution because it was literally developed to help parents manage their teen's spending. It offers all sorts of great features, including the ability to put your child's allowance onto the card, text notification every time the card is used (including the purchase location and amount), and being able to lock/unlock the card via text. Note that this card won't help establish a credit history for your child because it's a debit card and not a credit card, and like other debit cards, it charges fees that can add up.
- For young adults in college, we recommend the Citi Dividend Platinum Select MasterCard for College Students. Parents do not need to co-sign on this card if their child can qualify and it offers a 0% APR on purchases during the first 7 months, as well as cash back rewards.
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