We seem to be moving closer to being a cashless society, meaning more kids are being exposed to digital wallets, money apps and yes, credit cards. While digital wallets and apps can be great learning tools for older kids who understand money – credit cards can be dangerous (at any age).
As a financial planner who sees so many buried under massive debt, I typically discourage the use of credit cards (at any age). American card balances reached $1.13 trillion in the last three months of 2023, up from $986 billion at the end of 2022, according to a Federal Reserve Bank of New York report. The average credit card balance in 2023 was $6,501. Additionally, on a monthly basis most Americans don’t pay their credit card balance in full every month, leading to interest fees.
Normally I say something like, these numbers aren’t meant to scare you…but these are! Taking on a credit card shouldn’t be taken lightly by anyone, especially when it comes to your child. Credit card debt is easy to grow, and with the average credit card interest rate on new offers at 22.9%, it can be difficult to pay off.
However, credit cards can provide some valuable benefits to the older kids if done in the right way. If your teenager uses it responsibly, having a credit card can establish and build credit and can be a great tool to practice money management. On the other hand, if they overspend and/or don’t pay on time, both you and your child can get into trouble. If you are a parent and considering giving your child a credit card, there are some limits already set up for your child’s protection. Below are two scenarios where a child could get a credit card, and how to do it responsibly.
Scenario 1: If your child is not over the age of 18, they aren’t considered a legal adult and cannot get a credit card in their own name. If this is the case you could make your child an authorized user on one of your credit cards. This means they could use the card and it would show up on their credit report, but your child wouldn’t have any legal responsibility for the account. This allows your child to begin building credit and practice using a credit card without the consequences. As a parent, if you go this route be sure to set boundaries up front as to when your child can use the credit card. This may be a card only to be used for emergencies, or maybe it’s for gas, school supplies and food. Whatever the parameters, be sure to monitor the spending – one way is to set up alerts if your child goes over a specified amount. Some cards also let you set up credit limits for the authorized user, which will prevent costly mistakes.
Scenario 2: Young adults who are over 18 but under 21 can get a card in their own name, but they either must 1) make sufficient income to pay back borrowed funds or 2) have a cosigner. If you cosign, your child will get a card in their own name and will be legally responsible for any debt associated with the account. Keep in mind, as a cosigner you will also be responsible for that debt. If you cosign for a card, be sure the credit limit is something you are comfortable with – the lower the better initially. Once they’ve demonstrated they can use it responsibly, it can be increased.
Helping your child have a credit card can be a jumpstart towards learning responsible spending, how to manage money and building credit. But like everything else in life, there has to be limits and it needs to be done responsibly. Make sure your child understands the potential dangers of credit card use upfront; explain to them that you are giving them a card because you want them to learn how to use it responsibly as an adult, meaning never carrying a balance and always paying on time. More on credit cards and kids in my book Beyond Piggy Banks and Lemonade Stands: How to Teach Young Kids About Finance.
