Has your child expressed interested in a credit card? If the thought of this sends shivers down your spine, you’re probably not alone. Managing credit cards can be challenging for some adults – let alone children.
But if you think giving your child a credit card is scary, letting them dive into the world of credit unsupervised is even scarier.
Instead, turn the request into an educational tool.
Every time you are shopping and you use the card, explain how the card works. Then, when your monthly statement arrives, sit down with your child, review it together and explain the process again. Make sure you cover such things as due date, payment options and of course, interest rates. Using a calculator to illustrate what interest rates are is particularly helpful. Finally, talk about what happens if you don’t pay the balance in full and make it clear that it’s critical to always pay the full balance.
When you feel that your child has a solid understanding – and respect – for how credit cards work, help them start their own credit history.
With the passing of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, anyone under 21 who applies for a credit card must have a co-signer on the account or be able to show their ability to pay bills.
Despite this, you have many options:
Pre-paid gift cards give your child the ability to learn how to buy on credit, while reducing their risk of landing in debt troubles. However, be careful. Pre-paid gift cards – from Visa or MasterCard – typically have maintenance fees associated with them. Educate yourself fully before signing up.
Pre-paid debit cards are another option. These types of cards are issued by a financial institution and preloaded with funds, making it possible to use them just like a normal credit card. The downfall of these cards is that they don’t build credit.
Secured credit cards
A secured credit card requires you to make a deposit against the card’s credit limit. Then, if the bill doesn’t get paid, the bank uses the deposit to cover it. Many banks place your deposit into an interest-bearing savings account where it stays until you close your account, upgrade to an unsecured credit card or default on your credit card balance. Other than that, secured credit cards act just like regular credit cards.
Some – but not all – secured credit cards report to the major credit bureaus. Confirm that your card does if you want your child to start building a credit history.
An authorized user on your credit card account is a person who’s authorized to make charges on the account. The authorized user gets the benefit of the credit card without the official responsibility. Many people call these types of cards, “credit cards with training wheels.” Authorized users build some credit history, but not as much as a co-signer.
Getting your child a credit card is a big step. But if you do it correctly it’s the first step towards a life of financial responsibility.