Money Smart Kids
Is Your Child Ready for a Credit Card?
Don't rush your kids into credit too soon. They need to have the maturity, experience and income to handle it.
By Janet Bodnar, Editor, Kiplinger's Personal Finance
August 27, 2009
Editor's note: This story has been updated in 2010.
Today I told my son Peter that he should consider applying for a credit card.
That might surprise readers of this column, who know I'm cautious about recommending credit for young people. But I think Peter, who's a junior in college and is turning 21, has earned the privilege.
For the past two years he's been managing his summer earnings with two checking accounts (one at home and one at school) and a debit card, and I'm impressed with how well he's done:
Peter has overdrawn his account only once, and as soon as he discovered his mistake he transferred money from home to his school account to cover the overdraft. He asked me if he'd still be hit with a $30 penalty. I told him that if he was, he should ask the bank to waive the fee. He was never charged.
This year he's living in a house with eight guys, and he's been diligent about contacting the water company (his responsibility) and paying his share of the rent and other utilities.
He recently told me that he keeps most of his money in savings and transfers money to checking only when he needs it. "If it were all in my checking account, I'd spend it too freely," he explained. "When I take it out of savings, that really hurts." (Peter thought of this strategy on his own, but I'd recommend it to any adult.)
It seems to me that when it comes to credit, parents often think more like adults than kids. That can lead them into a couple of pitfalls. Fixated on establishing a credit rating, they sometimes rush young people into credit too soon, before they have the maturity and experience -- not to mention the income -- to handle it.
At the other extreme, parents often assume that older kids know more about credit than they really do. Even college students need to be told the most basic facts. For example, they don't always realize that a credit card isn't cash; it's a loan for which they'll likely pay a double-digit interest rate.
Young people under the age of 21 can't get a credit card unless it's co-signed by someone 21 or older. The hope is that parents who co-sign will talk to their kids about annual fees, interest rates and the importance of paying their bill in full each month. But there's no guarantee that parents will have that conversation. And the new requirement could have unintended consequences.
For instance, parents might simply take the more convenient route of making their kids authorized users on their own cards. But that means young adults would be even less likely to learn about managing credit because Mom and Dad are still responsible for the bill.
I'd prefer to see kids follow Peter's cash-first route and then apply for credit on their own when they're 21. Right now Peter has three offers sitting on our kitchen counter.
If getting credit is a problem, however, young people can always apply for a secured card, which requires them to put up a deposit equal to their credit line but limits the trouble they can get into. After a year or so of paying their bills on time, they can upgrade to an unsecured card with more favorable terms. (You can search for credit-card offers at CardHub.com.)
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Reader Comments (7)
Posted by: Steve at 08/30/2009 01:18:22 AM
Does it make sense to get a credit card in a young child's name to start building their credit? Or add them as a user of an existing credit card? I'm think of my kids who are only 5 so they won't use the card - but I could use it as a joint account owner to build their credit, and just pay off the balance. By the time they're old enough to really use it, they could have 15 years of credit history to build off of.
Posted by: kevin at 08/31/2009 07:57:25 PM
That is the most ludicrous thing I have ever heard. Do your kids a favor and teach them NOT to borrow money. That's how this whole financial mess started.
Posted by: David Palmer at 09/02/2009 09:40:04 AM
I agree with Kevin. Debt is the worst thing that our society has learned. We must teach our children to curve the attitude. Don't make the rich richer. Make your self rich. Save and invest.
Posted by: David Palmer at 09/02/2009 09:43:52 AM
"The hope is that parents who co-sign will talk to their kids about annual fees, interest rates and the importance of paying their bill in full each month." The banks aren't that foolish. They know that younger people have a high default rate. If a bank can force a co-sign they have a better garauntee of money coming in. It's just a money making scheme.
Posted by: Leon Archer at 01/14/2010 11:32:59 PM
My daughter went to college last year and got a credit card. She is now 19, does this new regulation effect her situation. Is she still responsible for this balance, or does the new regulation grandfather her situation!
Posted by: Cathy at 03/24/2010 11:35:08 AM
I worked with my daughter to get a credit card before the law for 21 and over went into effect this year. she is going to college next year. The banker and I talked through all the rules for about an hour. she has been told to see us before she ever thinks about missing a payment. she has shown that she is responsible for money with her checking acct and debit card, which is critical. You really need to see where the child is in terms of maturity and they need to take the steps to get there, like online banking to check balances, transfer funds, etc. the key advantage is that there are so many internet transactions these days and they do have better fraud control on a credit card than a debit card. She has also been told not to let any of her friends know she has it.
Posted by: Stacy Evans, icreditinc.com at 03/24/2010 03:46:47 PM
You taught your son very well. I completely agree with the government upping the age to 21. Even if parents never get around to having that conversation with their kids, it may give them more time to be exposed to the information they need to know. Another problem is that 18 is a very unstable age. At that age, kid's are just getting out of high school and they are experiencing a freedom they've never encountered. That plus a card full of money can only end badly.