You may be looking at your kid and thinking, "there's no way she's ready for a credit card."
But packing plastic in your child's bookbag is getting more common. The number of kids ages 8 to 14 with access to credit cards has quadrupled in the last five years, according to a survey by T. Rowe Price.
The right age to start varies depending on the child’s maturity level, so you know best. Here's how to teach your kids about using credit cards responsibly before handing one over.
LEARN TO BUDGET
Before children (or anyone for that matter) can use a credit card responsibly, it’s important to learn how to keep track of cash and manage a budget. This can start with cash allowances. Elisabeth Donati, a financial coach who also leads personal finance camps for children, recommends giving an allowance to teach children how to plan for things you would buy them anyway, such as clothing. Starting with small things gets them on the way to financial literacy. “If they’ve not had any practice, they won’t know how to pay bills or evaluate a bill,” Donati says. “No person learns anything the first time. Money takes practice, just like learning to swim or play the flute.”
OPEN A BANK ACCOUNT
Once children show they’re able to track cash, it’s time to visit the bank. Tracking expenditures in an account is a skill that needs to be learned. This is not easy, as most adults don’t even keep a daily tab on their balances. Donati emphasizes the importance of opening both a checking and savings account, or at least multiple accounts, so children learn to put money into savings to plan for larger expenditures down the road.
START WITH A DEBIT CARD
Before graduating to a credit card, try a debit card. Mistakes are inevitable when learning how to handle money and budgets, which is why many parents prefer to start with a lower stakes option. For children who already handle a budget through their bank account, the debit card can act as an extension, making payments easier.
COVER THE RISKS
As part of their financial education, children should learn how to compare credit cards, look at interest rates and understand the risks of borrowing too much and not being able to pay it back. Given the average U.S. household carrying debt has a credit card balance of nearly $16,000, according to NerdWallet, it’s not just children who could use an education on responsible credit card use. Kids starting college are inundated with offers, many dangling seemingly attractive perks such as points, water bottles or T-shirts.
Parents who want their child to start using credit might consider adding them as an authorized user on their existing credit card account. An authorized user gets their own card, charges to the main line of credit, and isn't responsible for any bill payment. If the parent has a good credit rating, adding kids as authorized users also gives them a strong start for their own credit history.
You may also choose to open a new credit card account in your child's name and act as a co-signer. As a co-signer, you essentially vouch for the primary user's purchases and may be on the line for debt accrued. Credit card companies aren't required to notify co-signers if the primary user exceeds the limit or makes late payments. This, in turn, can affect your own credit score.
SET LIMITS ON CREDIT CARD USE
Discuss what the card is to be used for. Ideally, credit cards should be used for things you would purchase anyway and have already budgeted and saved for. Credit cards make it easy to buy items you can’t really afford, so building a foundation of financial responsibility is key to prevent snowballing debt. A good way to put it, Donati recommends, is to frame using credit as using someone else’s money to pay for something now that you’ll pay back later. However, “other people don’t loan you money without a cost,” she says.
If you decide your child should only use a credit card for emergencies, make a very defined list of what's considered an emergency. Car tires or bike repair qualify; shoes on sale or going out with friends do not.
“Just remember that children will be children,” Donati says. “As hard as credit cards are for adults to use, they’re so much harder for a child to use.” Frequent check-ins about budgeting and usage can help children build their money habits now and in the future.