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It’s a common refrain from older generations: “These kids today all have credit cards! When I was young, we paid for everything with pennies and pocket lint.”
You’ll hear the same sentiment about cell phones, video games, and just about anything else invented within the last fifty years.
It’s true that more kids today are getting credit cards, but that might not be such a bad thing. If used responsibly, credit cards can be a powerful tool for learning—and building a strong financial foundation for the future. If used irresponsibly… well, that would be more like building a foundation on quicksand.
If you’re considering whether or not to give your child access to a credit card, read ahead for the pros and cons.
Why it’s a good idea
When my husband and I were dating, I asked if I could look at his credit score. He told me to go ahead—he wasn’t sure what it was himself.
Turns out, it was a big fat zero.
He had never built a credit history for himself, preferring to pay off any purchases with cash or a debit card. No one had ever explained to him the importance of building a credit history through responsible use of a credit card, so it took us over six months to build him a respectable score.
Thankfully, you can help your kids avoid this situation. If you have a stellar credit history and add your child as an authorized user on your card, some credit cards will report that information on their credit history. It will help them build credit and allow them to get a leg up on life.
My parents added me as an authorized user when I was 16. By the time I graduated college, my credit score was already in the 700s. I didn’t need them to cosign on my first real apartment and even though I’m only 29, the oldest account on my credit report is more than a decade old.
You don’t even have to give your child a physical credit card for them to benefit from your responsible credit usage. As long as you add them to the account, they should start building a credit history. Real estate investor Jennifer Beadles said her three year-old already is an authorized user on one of her credit cards.
“It makes buying a home and getting an apartment a lot easier,” said financial planner Kevin L. Matthews. “Imagine starting adulthood with an 800+ credit score.”
How it can lead to issues
Obviously, the above is an ideal situation—but things can always get a little hairy when developing young minds are involved.
Once, I went on a minor shopping spree while I still had my parent’s credit card. Seeing the look of disapproval on my mom’s face was enough to make me watch my spending on that card, but the damage was already done.
Giving your kid a credit card can be like giving them a car. If it goes well, they learn about being a responsible adult. If it goes poorly, it will cost you thousands of dollars. They’ll still learn a valuable lesson, but a harsh one.
No matter who spends the money, the person named as the main cardholder is responsible for the balance. If your kid buys a $300 Nintendo Switch on your credit card, you’ll be on the hook for it. If you can’t pay off their balance within that billing cycle, you’ll be responsible for any interest fees.
How to make it work
Bill Dwight, creator of the financial literacy program FamZoo, said he likes giving kids both a credit card and a prepaid debit card. They can use the credit card for a recurring monthly payments, like a cell phone bill, and the prepaid debit card for all variable expenses, such as gas, clothes and school supplies.
This system gives kids the benefit of growing their credit history while not being able to overspend on a credit card. You can teach them to set up autopay, so they never have to worry about late fees or interest charges. Parents should also warn their kids of identity theft and how to monitor their card for fraud.
When you add a child to your credit card, make their credit limit something small. Set up alerts if they go over a certain threshold and monitor their activity. Make it perfectly clear to them what your expectations are, and the consequences they’ll face for stepping over the line.
American Express is one of the few credit card issuers that allows cardholders to choose what kind of credit limit they want for an authorized user. In fact, AmEx will even send you emails about their spending history and notify you when they’ve reached the limit.
Paul Vasey says he thinks children should learn about credit cards before they go off to college and are tempted to sign up for a card. Think of it like drinking alcohol. If you teach your child that drinking in moderation is fine, they won’t be tempted to down a handle of vodka once they enter college.
“I don’t see any laws being brought out that will prevent college kids from getting their hands on cards even though a credit card is far more dangerous than a bottle of beer,” he said.
Other options for kids
Current, Greenlight Financial Technology, and FamZoo are three of the biggest rising stars in the fintech family space. They can help parents looking to introduce their children to the world of credit.
Greenlight’s debit card gives parents the control they want while teaching their kids about responsible spending. The Greenlight card is tied to an app with parental controls, complete with freezing abilities. Parents can also limit what kinds of stores their kid can shop at and transfer money to them instantly.
Current’s debit card is designed to teach teens how to budget. Parents transfer a set allowance, and their kids learn to divide the money between three goals: spending, saving and giving. Current even has a round-up feature, where change from purchases will automatically transfer to a child’s savings account.
FamZoo teaches kids about budgeting and how to allocate their money toward their needs. Parents reward responsible spending by increasing how much interest their kids earn. They can even set up savings goals for the child to reach.
Any of these options can work as a safer alternative to credit cards.
Giving your kids a credit card—with limits—is a great idea. They’ll build credit and be fully prepared for adulthood when the time comes.
But, if you don’t teach your kids responsibility, they may wind up costing you a lot more than you bargained for.