Kids And Credit Cards: Everything You Need To KnowBy Paul Rubillo | Published February 8th, 2013
If you’re responsible with your credit cards, they can be very convenient and useful in your day-to-day finances. If you have a no- or low-fee card that offers rewards points, and you always pay your balance on time, credit cards actually earn you money when you spend. For those that aren’t responsible, however, credit cards are a one-way ticket to growing debts and bad credit. Many people have to have a bad experience with credit cards in order to treat them responsibly, and usually those credit card mistakes happen when you’re first starting to use a credit card. For this reason, it’s a smart idea to prepare and educate your child on credit cards before they obtain their first one.
As parents get ready to send their college-bound students off to years of higher learning, this can usually lead to a young adult’s first experience with credit cards. There are plenty of tips that can help parents avoid potential financial pitfalls early on. The first step is getting your child to read some educational articles on how credit cards work. You don’t want the $500 or $1,000 limit on your child’s first credit card to seem like free money, so it’s important that they understand when a card should be used, when it needs to be repaid and the consequences of not repaying credit card debt.
Explaining that a credit card is essentially a short-term loan is a good method to emphasize how a credit card should be used. As well, going over what a credit score is, how it’s calculated and how it can affect a person’s life when it comes to wanting to own a car or home, is very important. A credit card, at least at the beginning, should be seen as a privilege, and responsible use is paramount.
It will always come down to your own judgment when deciding whether it’s time for your child to get a credit card, so make sure you look realistically at your child’s spending habits and financial responsibility – allowing them to get a credit card when they’re not ready could have a negative impact on your child’s life. If you child does get a credit card, try to have statements sent home if possible, so that you can track your kid’s spending. You may be able to catch some unnecessary expenses that can be avoided.
Credit Card and Financial Mistakes To Avoid
One thing parents may want to avoid from the start is co-signing. Any bad spending habits and payment mistakes will reflect right back on parents’ credit scores. Next up, giving out your credit card number to your kids is a big no-no, and should be avoided if at all possible. Same rule applies to your Social Security number, bank account number, or any other vital data. This is all part of a defense plan to avoid having your personal identification swiped — kids can be careless and thieves know it.
Credit Card Alternatives
Starting your child out with a prepaid debit card might make the most sense when they’re just starting off. If you make the limit for the card around $500, and monitor it, then you can see how often your child uses this and whether they are re-loading funds onto it after they’ve spent the money. These will also allow your child the freedom to purchase things online, and even experience some of the rewards (airmiles, cash-back, rewards points) that go along with a credit card. If you don’t think your child entirely understands the seriousness of a credit card, prepaid cards are a good training instrument.
When You Need to Step In
If you have a child who may have started off on the wrong foot when it comes to being responsible with a credit card, pulling the plug on card privileges could be the best short-term course of action. Always keep close tabs on your child’s credit card use each month to be sure spending is not getting out of control.
The best money lessons can be taught during the teenage years, so if your child does get careless, consider it an expensive lesson they will need to learn. Suspending use of the credit card is the first move for a parent to make; but you shouldn’t close the credit card. The next idea is to come up with a plan that will have your child pay for the debt by working part-time or even selling some personal belongings. It may seem harsh to push your child to sell off some of their possessions, but the lesson they learn will be very worthwhile.
Teaching your child to pick themselves up after a setback is a life lesson that can be applied to other parts of their adult life.
The Bottom Line
Of course, young people will always make mistakes along the way, but similar to the stock market, you want to keep the mistakes small if at all possible. Also, if your child is responsible enough to save some money during their college years, be sure to get some of those funds invested in high-quality dividend-paying stocks. This practice should be established as early as possible to make sure the saving and investing discipline carries through beyond college.