Perhaps your teen is getting to the point where carrying around cash isn’t so convenient any longer. Maybe she’s signing up online for a crafts class, but she needs a credit card to do so. Or perhaps your student is away at college, and you’d rather he not carry a wad of $20s to the bookstore to pay for $400 worth of textbooks.
Is it time to let your teen or college student get a credit card?
First, you should know that the federal government has made it much tougher—thankfully—for anyone under age 21 to get a credit card. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) requires that anyone below age 21 either be able to show enough annual income to pay off his or her entire credit line or have a cosigner, such as a parent or spouse. The idea is to make it harder for minors to jump without thinking into credit card debt.
However, if you’re hoping to give your child a credit card with training wheels, you do have some options.
Perhaps the best strategy is to add your child to your own credit card account as an authorized user. Your child gets his or her own card to use, but you can easily track what he or she is charging. It’s a great way to help your budding adult start practicing good credit and money management habits.
As long as you’re paying your balance responsibly, your child will start to build credit in his or her name. Also, if your child is acting irresponsibly—racking up pizza charges that look like he’s feeding his entire residence hall, for instance—you can easily remove him from your account.
Other options you might consider include:
- Cosigning on a new credit account with your child as a joint user. This is a bigger step, and you need to make sure your child is ready. Many credit card issuers won’t even allow kids under age 18 to be joint account holders for this very reason. The big caveat is that if your child runs up big bills and doesn’t pay them, you are on the hook for what’s owed because you’re a co-owner of the account. If you want to remove yourself or your child as a joint owner, you will have to close the account, which requires paying off the balance in full.
- Opening a secured credit card. This is a good idea if you’re not sure how responsible your child will be with credit. The credit line will be limited to the amount of money he or she has on deposit at a related financial institution, so it will be tougher to overspend.
- Setting up a prepaid card (not a debit card). Prepaid cards are a great way to avoid the perils of debit cards. In addition to overdrawing an account, debit cards can be stolen or cloned and used fraudulently. If thieves get hold of a debit card, they can wipe out your child’s entire savings or checking account. Instead, opt for a prepaid card and a basic ATM card for withdrawing cash if your child needs it.
Whatever method of plastic you choose, remember to talk clearly and often to your children about how to use it responsibly. Teach your kids how to regularly check their balance and compare it against their monthly budget or allowance. And show them how much extra they’ll pay in interest charges if they don’t pay off their account in full every month.
A credit card can make it easier to pay expenses and bills—but it should never be an excuse for your teen to spend mindlessly.