Ask Bill Hardekopf when to introduce children to credit cards, and he has a definite answer: 11th grade. If they plan to go to college, they will soon need emergency access to the cash offered by a credit card.
A card will also help them develop a credit score so that they can opt for car and home loans later. And by helping children get a credit card when they are still at home, parents have time to give their children an accelerated course on debt management, he said.
“It worked really well for us,” said Hardekopf, executive director of LowCards.com, a credit shopping website. “All of our children are financially responsible and had five years of credit history when they left college and started applying for loans. That gave them a real advantage.”
Should kids have credit cards?
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However, when it comes to the best way to get kids the first card, there is no definitive answer. Parents have four possible options. They can jointly sign their child’s card, turn the child into an authorized user on a parent’s account, help them establish a bank relationship that includes a low-limit card, or suggest that they obtain a insured card.
It is worth noting that children used to get their own cards, without the involvement of parents, but the Card Act of 2009 put a key in offering credit cards to people who do not have visible means to pay this debt, such as a job. or trust fund. Therefore, parents who want a full-time student to have access to credit may need help.
It is likely that the best option depends on both the student and their parents. Here are the options, their benefits and harms.
Co-signed card: Hardekopf chose to sign for their children together, but for many parents this is an accident waiting to happen. This is because the primary account holder, in this case your child, is the only one receiving an invoice. If he or she does not pay it, the co-signers may not know it until the debt becomes seriously delinquent and damages both the child’s credit score and that of the parents.
In addition, the child can usually increase their credit limit without notifying the co-signer. Therefore, if you need to pay for the card to save your credit score, the tab may be higher than you expect. This combination makes joint credit signing a good option only when you have children you trust.
Hardekopf further reduced the risk by making sure his children had the plastic while they lived at home. In this way, the bills would reach his address, which would allow him to control the behavior of the children. The Hardekopfs also demanded that their children open the bills quickly and pay the balances in full each month.
For those who have time to supervise and children with the right disposition, Hardekopf’s approach can be a great way to teach financial skills. But if your children are less responsible or cooperative, consider other methods.
Authorized user: Another option is to make the child an authorized user on one of your existing accounts. This is usually as easy as calling the credit card company and asking them to add the child. They will issue a second card in the child’s name, which the child can use as their own card. The only difference? The child’s charges appear on your bill.
This is the downside: while you may have an agreement that requires your child to pay their own charges, by law, you are responsible for every penny. If your child goes wild during the spring break, you could keep the bill.
On the other hand, your child cannot increase the credit limit on this card and you can control their spending as actively as you want. If your child’s credit behavior is bad, you can terminate their authorized user status. You can also make the child an authorized user with a card that has a small spending limit.
When it comes to helping your child establish a credit score, the authorized user approach has some advantages. This is because the authorized user usually gets credit for the entire payment history of this card. So, if you had this card for five years and paid your bills religiously, your child will lean on your good payment history, getting credit for more years of money management than really applies.
Bank card: Some banks will agree to provide children with a low-limit credit card when they open a checking account. These cards are not “insured” for their bank deposits and usually charge high fees on revolving balances. But they are a great option for a responsible child willing and able to pay off the entire balance each month.
It is worth mentioning that almost all banks automatically offer a debit card with student current accounts. Don’t be fooled by the Visa or MasterCard logo. These are not credit cards and debit cards do nothing to establish a credit history. If you want to help your child create a credit score, you need to apply for a credit card loan.
Secured cards: If your child is not particularly responsible with money, the best option may be a secure card. These cards are issued with low credit limits and are usually fully guaranteed by a corresponding deposit at the same bank. In other words, if you deposit $ 300, the bank will give you a credit card with a spending limit of $ 300 (or less).
However, most guaranteed cards charge annual fees, are charged with penalties for misconduct (such as late payment or exceeding the credit limit) and the rate you pay on a revolving balance is much higher than what you could earn with your balance. deposit. Therefore, insured cards can be expensive.
On the other hand, your financial risk is usually just the amount of the deposit. And some cards come with bells and whistles that can be useful. For example, Capital One’s insured card, which has a reasonable annual fee of $ 29, allows children to monitor their credit score and use a credit simulator to see what would happen to their score if no payment was made or continue to pay on time for an extended period. period.
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