Getting Your Kids Their First Credit Card

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Getting Your Kids Their First Credit Card

Why provide a credit card to a minor? It may help youngsters develop good financial habits from the start. Consider what may happen if you don’t: Credit card debt is one trap that many young people tend to slip into—and that sometimes requires a rescue from their parents.

The ease with which credit cards enable individuals to purchase now and pay later, coupled with a massive marketing campaign focused at young customers, has resulted in an epidemic of maxed-out 20-somethings. However, it is possible to educate your children excellent credit habits, especially if you begin while they are still under your roof. It’s important to consider the benefits and drawbacks of buying them a card, as well as when it would be most appropriate for your kid. Here’s what you should do if you decide now is the time.

Key Takeaways

  • Having access to a credit card may help a youngster develop responsible spending habits and start building a credit history.
  • Adding your kid as an authorized user on one of your accounts is a great approach to help them build good credit from the start.
  • Parents should use real-life examples to illustrate why excellent credit is vital.
  • Parents should encourage their children to do their own research to understand about various credit card agreements, particularly how interest rates operate.

Building Credit Early

Many parents assist their children in obtaining their first credit card so that they may develop credit. While building a credit history for your kid is a legitimate reason for taking this step, it is far from the most crucial. The length of time someone has utilized credit is just a modest (15%) element in establishing their credit score. Far more crucial (35%) is their payment history, precisely how often (or not) they have paid their payments on time. If your kid is incapable of paying at least the monthly minimum on time, do not give them their own credit card. 1

Adding a youngster as an authorized user to one of your credit cards with a lengthy history of 100% on-time payments and a low usage percentage (meaning a high limit and a low amount) is one of the simplest methods to assist your adolescent establish decent or exceptional credit by the time they reach the age of 18. Remember that their use is still your responsibility. Talk to your adolescent before adding them as an authorized user.

If you or they are worried about the possibility of irresponsible spending, have them place a tiny regular monthly expense on the card, such as Spotify or their favorite YouTube star’s Patreon. But first, have them agree not to be given the actual card or numbers until you’ve reached a mutual understanding that they’re ready.

They won’t be able to overspend on a card they can’t use, and they’ll still benefit from a lengthy credit history with low use and on-time payment history. Set up a monthly auto-draft from their bank account that pays off their credit card bill every month to assist them in developing that habit. If they can’t maintain $10 to $30 in their bank account to cover their subscription’s auto-pay, they aren’t ready for the card.

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Teach Them Why Good Credit Is Important

Sit down with your child and demonstrate how much money they may save on a home or automobile if they have good credit as opposed to bad credit. Begin by letting them choose their ideal automobile. Then enter the car’s purchase price into an auto loan calculator like the one below. Show them the difference in monthly payments between someone with a 740 credit score and a decent interest rate and someone with a 580 credit score. Pay close attention to how much higher the monthly payments on the identical automobile cost when someone has poor credit.

If someone can afford a $250/month vehicle payment, having excellent credit may be the difference between driving a three-year-old Toyota and a 14-year-old Saturn acquired from a predatory lender on a buy here, pay here lot.

Bad credit might prevent you from finding a job or even a place to live, in addition to saving money on loans. Teens who learn about money are more likely to desire to obey the rules than those who have never had the repercussions presented to them. 2

Interest Rate

or Credit Score

Monthly Payment

$ 537.70 /month for 6 years

Total Interest Paid

$ 10,714.32

Instilling Healthy Habits

The two greatest reasons to obtain them a card while they’re still living with you and can learn from you are to teach them excellent spending habits and a healthy perspective regarding credit cards. The great majority of individuals who are drowning in debt did it one purchase at a time. As a parent, teaching your children the distinction between necessities and desires, between instant and delayed satisfaction, can go a long way toward keeping them out of financial difficulties.

Before adding your kid as an authorized user on your card, sit down with them and establish ground rules. Some points may include talking through their monthly purchases together and agreeing that the kid would pay those bills in full unless you agree that, for a specific item, they can pay less than the whole amount for a certain period.

Avoiding Impulse Purchases

Reviewing and discussing your children’s monthly purchases with them will help them acquire insight into the impulsive thinking that leads some individuals to spend more than they can afford. Similarly, by requiring prompt payments for the whole month’s charges, you’ll assist them avoid the two things that may have the biggest negative impact on their credit score: late payments and excessive balances.

Providing a Safety Net

Of course, we hope that our children would select healthy credit habits on their own, but part of being a young adult is making mistakes and learning from them. Unfortunately, this kind of learning experience may linger on a credit record for years. 3

Another incentive to obtain your children their first credit card while they are still living with you is to create a safety net. You’ll be able to keep an eye on them and ensure that the dog doesn’t eat their payment, that they don’t get fooled into unnecessary monthly costs, and that identity thieves don’t strike gold at their expense.

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Best Credit Cards for Kids

The best time to put a card in your children’s wallets is when they are in high school, but instead of a credit card, start them with a debit card that deducts money straight from their bank account. Whether it’s a weekly allowance or a payment from their first job, they’ll become used to carrying a card and not spending more than they can afford. Then you may go to a legitimate credit card. Here are several alternatives to just adding them as an authorized user to one of your accounts:

Consider opting out of overdraft protection (so that the charge is denied when it exceeds the account balance) or assisting your kid with a system for tracking their spending as they go to prevent overdraft costs.

Secured credit card

A secured credit card, which restricts how much they may charge depending on how much you deposit with the card issuer, is one choice for youngsters.

Service station or gas card

Consider getting your child their first petrol credit card when they start driving. The card will very certainly have to be in your name. However, just possessing a gas card will enable them to get their feet wet in the credit world without the temptation or capacity to go overboard. Also, since many gas stations now feature mini-marts, consumers may make little purchases that they must still budget for and account for at the end of the month.

Low-limit credit card

Consider obtaining your kid a credit card to go along with their debit card once they graduate from high school. The credit card should ideally have a modest limit (about $500), a low interest rate, and a low (or free) annual fee.

Emergency-use credit card

Consider acquiring a family “emergency card” in your name but with your kid as an approved user if your child is off to college or relocating to a new place. This is a card that can be carefully stored in the event of a real emergency.

Researching the Best Credit Cards

When it comes to selecting a specific card, have your youngster do research and debate it with you. Many websites assess credit cards and the incentives they provide, including Investopedia’s own credit card ratings, which include student card evaluations. Ascertain that your youngster reads and comprehends all of the phrases on each of the cards under consideration.

Make certain that your youngster knows how credit card interest rates operate. Most children, and many adults, have no concept how rapidly compound interest may double a credit card bill or how a worse credit score impacts future borrowing rates. To assist your children in learning this, have them spend some time online researching these issues. Make it a requirement for obtaining a credit card. You could learn something as well!

Teaching by (Bad) Example

Telling your children about instances when you didn’t use credit cards sensibly is an excellent method to teach them. Explain how you got into debt, how you felt in the thick of it all, and how long and difficult it was for you to ultimately pull yourself out of it.

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The Financial Finish Line

If you’re like most parents, your ultimate objective is to assist your children financially “launch” once and for all. With that in mind, you’ll need to set a deadline after which you’ll let them manage their credit matters on their own. Failure to do so may cause them to become unduly reliant on you as a source of financial security, maybe for decades.

As a general rule, the best age to terminate credit connections with your kid is when they reach the age of 21 or 22. Make sure to inform them of the strategy a year in advance so that they can take any necessary steps. They should be able to handle credit effectively on their own thanks to your previous efforts.

How Old Should Kids Be for a Credit Card?

What Are Good Credit Card Alternatives for a Child?

A debit card is an excellent method to begin educating your youngster about budgeting and avoiding overspending. Some programs, such as Greenlight, have parental controls that allow you to easily monitor your teen’s spending. 7 If you want your children to have access to money that you can monitor but don’t want them to have a complete bank account, setting up a product like Apple Cash with parental controls under a family account may be a smart option. 8

How Do I Know My Child Is Ready for a Credit Card?

Children who seem to comprehend the difference between desires and necessities and who regularly have more money coming in than going out each month may be ready for a credit card.

Can Adding My Child as an Authorized User Hurt My Credit?

If you add your kid as an authorized user on one of your credit cards and they use it recklessly, such as carrying a large debt (increasing your usage %) or failing to make at least the minimum monthly payment, your credit score may suffer. You may avoid this by setting up auto-pay for the monthly minimum and keeping track of the card’s balance.

The Bottom Line

A strong credit score is an excellent instrument for accumulating money later in life. Helping your children realize the importance of having a high credit score and assisting them in building one may offer them a considerable advantage. The simplest method to do this is to add them as an authorized user on one of your cards. Make sure they understand the risks of irresponsible credit use and assist them in researching numerous card alternatives, conditions, and fees before signing them up for one.

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