47% of adults in the United States have credit card debt, and in many cases, they can only pay the minimum each month. This leads to an ever-increasing debt. Seen from this perspective, thinking about offering a credit card to our children seems like a self-destructive project. But let’s take a step back and analyze the issue without prejudice since giving debit or credit cards to a minor can be a great advantage in their early financial development.
All of us parents want to make the best decisions when it comes to our children. And while we’re talking about credit cards for kids, it’s not about giving them access to unlimited funds to buy whatever they want indiscriminately. We’ll leave that to their Hollywood idols with their extravagant lifestyles.
Rather, it’s about helping kids build their credit from an early age and teaching them to use it responsibly, thereby avoiding costly mistakes when they’re adults. We don’t want them to be among the 47% who are up to their necks in debt, but instead, we want them to start understanding as early as possible where the money comes from and how they should manage it.
There are two strategies for obtaining credit cards for minors:
- Depending on their age, they can be added as users to your card.
- They can get their own credit card
15% of a person’s credit score is determined by the length of their credit history. The earlier they start building their credit, the better. This 15% is the hardest to build because it takes time, compared to other factors such as paying on time. Even if you are a good payer, if your credit history is short, it will affect your score.
A good credit score will help your child pay less for car insurance, be a better candidate for approval when renting an apartment, receive a better interest rate overall, and avoid having to make security deposits for their own phone or utility bill. But above all, it will teach them how to manage their money responsibly from a very young age, where their parents can observe the account activity, guide them, and set controls and limits that help them explore money management in a safe environment. Exploring the financial world with parental support puts them at an advantage over other young people who get their first card once they have gone off to college or are living on their own.
What are the advantages and disadvantages of adding your children as users of your card?
They receive the card in their name, and they have access to your credit. Users generally “inherit” the account’s credit history, so you want to make sure you add them to an account that you manage responsibly. Some large banks have no minimum age requirement for adding a user, such as Bank of America, Chase, and Wells Fargo. One important consideration is that you are responsible for payment.
Just as the benefits of having your children as users on your card are shared, so are the mistakes! Irresponsible use of credit by one of the authorized members will affect everyone, and even when a user is removed from the account, the responsibility of the account holder remains. Another risk is that being the most prevalent form of debt, a young person can incur a level of expenses that will be difficult to get out of if they do not have the proper preparation and discipline. Therefore, as parents, we have to help them understand the use and management, and decide accordingly if they are ready for that responsibility.
Another option to help them build credit is to add them as users without giving them the card. Once they demonstrate maturity and responsibility, you can give it to them, but in the meantime, they are already building their credit without even knowing it.
What are the pros and cons of helping kids get their own credit cards?
In this case, they have their own credit card that they can manage, but with parental access and valuable checkpoints.
A great credit card option for kids under 18 is the FamZoo Prepaid Card. It’s a great alternative because both parents and kids have access to the same account. This card has different security and management mechanisms. Among others, you can lock and unlock the card and connect it to different tasks. For example, you can use FamZoo to list tasks for which you’re going to pay your kids. They can choose which ones they’ll do and then they must mark them as completed when they’re done, receiving their payment automatically through the app. I like that it teaches them that money doesn’t grow on trees!
Plus, since they can divide their money into 4 categories (spending, saving, investing, and charity), parents can encourage good habits by matching contributions kids make in the saving and investing categories, for example. Parents can also choose to pay them interest on their savings. Sure, the “interest” comes out of your pocket, but we’re talking about their financial education, and this is a better option than opening your wallet and giving them money to buy something without them appreciating or understanding where it comes from.
Other good options for credit or debit cards include Greenlight, GoHenry, and Busy Kid Visa Prepaid Spend Card. Like adult debit cards, these don’t help build a teen’s credit, but they do help foster good financial habits.
Let’s agree that many of the credit problems we have today as adults are the result of not being allowed to manage money when we were children, and it being taboo for our parents to talk about these issues with their minor children. So, for many of us, the first experience managing our own funds was when we started working and experimenting.
I believe that if we can give our children the opportunity to enter their first job with a comfortable grasp of their finances, they will be in an excellent position to efficiently manage their funds, valuing savings and investments.
