If you have teenagers at home, it may be time to have the talk: Should they get a credit card?
“Kids generally think it’s the norm to have a card at 15 or 16 years old,” says Paul Golden, spokesman for the National Endowment for Financial Education.
“If your kid is showing financial maturity, then I think it’s fine to start them on the process.”
Learning about money and credit is a fundamental part of growing up. Here’s how to know whether it’s time for your kid to get one.
How does a kid get a credit card?
Generally, you’ll need to be 18 to apply for credit, although the age restriction differs by state. Even then, you’ll have to prove a steady source of income or get a co-signer on your account until you’re 21. These restrictions are due to the Credit CARD Act of 2009.
But there’s a loophole: In some cases, parents can add minors to their account as authorized users, although some issuers impose age limits for this type of cardholder. For example, Bank of America and Chase don’t list an age limit for authorized users, while American Express puts the age limit at 13.
The right age will be when your own child is ready to manage credit, Golden says. His two sons don’t have credit cards, but he’ll start considering it around age 16 — when it’s time for them to start driving. He recommends starting your kid off with a checking or savings account at a young age, so they can learn the fundamentals of money management. Your bank might even have a debit card geared toward kids learning to use money. Once your kid shows financial maturity, they could be ready to graduate to a credit card.
Trent Davis, a real estate broker associate with Coldwell Banker near Tampa Bay, Florida, agrees that 16 or 17 is a good time to consider getting your kid a credit card. Davis and his wife co-signed a credit card account with their daughter as soon as she turned 18. “When we realized that she was mature enough to understand finances and how credit cards worked, we decided it was the right time to get her one,” Davis says. “The most important part of her getting a credit card at 18 was to start building her credit profile early.”
Benefits for kids getting a credit card
Getting your kid a credit card is more than just giving them freedom to buy apps and make Amazon.com purchases. Giving your kid a credit card can:
Help them establish a credit history. It’s the Catch-22 a lot of people complain about: You can’t get credit without a credit history, but you typically need a good credit score to qualify for credit. However, your kids don’t need a credit history to qualify as authorized users, and it allows them to piggyback on your good credit. If your kids are going off to college in a few years, having strong credit helps them with things like qualifying for private loans, renting an apartment, or buying a car.
Teach them financial responsibility. Skills such as budgeting, saving, reviewing credit reports, and paying bills will help your kids spend and save responsibly as adults. Getting parents involved early on is key, Golden says. Even financial missteps, like missing a credit card payment or spending money on unnecessary items, are good learning opportunities.
“That’s where you want them to make that mistake,” Golden says, “while they are under your protection.” Teach your kids how to use a credit card, and when they make mistakes, talk to them about what happened. Then give them solutions for avoiding the mistake in the future.
Make purchases easier when parents aren’t there. Your kids have their own responsibilities and schedules, along with their own expenses. Whether they’re attending school trips, playing sports, or attending dual-enrollment classes at a community college, it’s far easier for them to make necessary purchases when they have their own credit card. Plus, they’ll have access to money in emergency situations if they need it.
Drawbacks to kids getting a credit card
Giving your kid a credit card comes with risks, so be ready to help guide them through mistakes.
They could be tempted to overspend. It’s one of the big risks, Golden says.
“The overarching downside to any credit card for any user is irresponsible spending.”
Among people in the Gen Z age group, the average credit card debt is $2,057, according to a 2017 report from credit bureau Experian.
Their credit scores may suffer. When generating a credit score, credit-scoring models measure payment history, credit used, new credit, types of accounts, and the age of accounts. If your child overspends, misses payments, or otherwise shows irresponsible credit use, their credit scores will take a hit. On the flip side, if your kid is listed as an authorized user on your account, then any negative credit behavior on your behalf could hurt your child’s credit.
Kids may break the rules you’ve imposed. It’s not really a secret: Kids break the rules from time to time. Be prepared before this happens by discussing the credit card’s features and agreeing on rules and consequences.
Best tips for giving your kid a credit card
Once you’ve decided to add your child as an authorized user, he’ll receive a separate credit card in his name. Generally, authorized users can only charge purchases and can’t make balance transfers or request cash advances. Here are some ways to help your kid achieve success with a new credit card.
Teach them about their credit card. When you get the card in the mail, “it’s a great time to sit down and talk about the features of the credit card,” Golden says. Those include: the card’s due date, annual percentage rate (APR), fees, and rewards.
However, “rewards shouldn’t be the focal point right now,” Golden says, because it could encourage extra spending.
Set up spending limits. Most cards will let you set different credit limits on authorized user cards. To determine that limit, consider your kid’s typical expenses and how much income they earn. And because credit scores take credit card utilization into account, think about how much you want your kid to use versus the credit line on the card. Some credit experts suggest keeping your utilization to 30% of the card’s limit. So if you set your kid’s credit card limit to $500, then he should agree to use just $150 a month (and pay it off monthly).
Agree on rules and consequences. They’ll have a better chance at success if they’re part of the discussion and understand the reasoning behind rules. Better yet, if they make some of the rules themselves. Discuss and agree on these points:
- Spending limits for each purchase or each month.
- What’s considered an acceptable purchase.
- Whether your child has to ask permission before using the card.
- Who pays the bill? If you’ll make the payment, when is your child’s portion due to you?
- How to avoid identity theft and ways to keep the credit card information private.
- Who gets to use the rewards?
Just as creditors aren’t lenient with mistakes, you should teach your child there are consequences to misusing a credit card. For example, you might take away the credit card until your child shows responsible behavior. In the meantime, keep teaching them about money and credit cards.
Provide resources for financial advice. Chances are, your kids know their way around the internet and apps. Teach them about trusted resources they can use to understand their credit and money, such as the National Endowment for Financial Education, MyMoney.gov, and the Consumer Financial Protection Bureau. Using an app such as Mint helps them track their spending. Also, setting up credit card alerts helps them remember to pay their credit card bills on time.
Your monthly credit card statement offers a great learning tool, too. The minimum payment warning on each bill shows how long it will take to pay off the current balance if you only make minimum payments. Seeing that can stir enough motivation to pay off the credit card bill every month.
Set up purchase alerts on your card. When your kids are authorized users on your account, you’ll want to know when they use it. This helps catch fraudulent purchases, and you’ll be able to see how your kids are spending their money.
Help them check their credit reports. Kids are an easy target for credit card and identity theft. More than 1 million children were identity fraud victims in 2017 alone, according to a 2018 Javelin Strategy & Research study. Start regularly checking your children’s credit reports while they’re young, using services such as Experian’s Child ID Scan. Once your kids have their own credit cards, help them learn to monitor their own credit reports.
Let them take the wheel. Inexperience can cause younger credit card holders to make basic mistakes, such as simply making the minimum payment every month. Whenever possible, let them make the budget and pay the bill to give them real-world credit card experience. For example, Davis’ daughter has a part-time job and saves enough money to pay off the credit card in full every month. “We leave it up to her to pay (the bill),” he says, “but we will always confirm that she does until we both feel confident that she’s fully mature enough where we don’t need to check on it every month.”
So, bottom line, when should your kid get a credit card? As soon as they’ve shown they understand the risks, can be responsible in other areas, and are ready to learn about their personal finance. A credit card at an early age is just fine if you start small and stay involved in the process with them. You know your kid best, after all.