Thinking about giving your child a credit card but are concerned about the risks? There are many potentially positive aspects to giving your child access to credit, but there can be negative consequences as well.
In these times where many people rely on credit heavily, it is ever more important to teach responsible credit usage before adulthood. Many mistakes that people make later in life might be avoidable if they had some opportunity to practice. By educating our children, we can foster responsible borrowing, which is important to our economy at large.
While a credit card can be helpful in emergency situations, and can be a strong educational tool, it's important to be aware of the potential credit reporting ramifications, and to not cause a child to be reliant on their parent's credit in the long run.
Adding a Child as an Authorized User
Since it is difficult, if not impossible, for most children to get approved for their own credit card, a popular approach is for a parent to add the child on one of their existing cards as an "Authorized User". Many creditors offer the option to preset a spending limit. This is especially important to establish when providing a credit card to a child in order to avoid incurring charges in excess of your comfort level. You may also set email or text alerts to inform you whenever a transaction occurs over a set amount.
Building Credit History
Another benefit of adding your child as an authorized user is to help them build credit history on their credit report. Most young adults are stuck in a catch-22, they have difficulty getting credit due to a lack of credit history. By helping your child build their credit history, you are putting them in a better position to establish their own credit in the future.
Use a Separate Credit Card Account
When providing a credit card to a child, it may be best to provide a card that you do not regularly use. This will allow the monthly statement to clearly reflect the charges that were made by the child, along with the corresponding minimum payment, and the effective interest accruing on such purchases. Providing the monthly statement to your child can help them understand how their transactions add up over the course of time, how minimum payments affect balances, and how compound interest can cause a balance to grow at a substantial rate. The statement may also provide a free credit score, which can expose the child to the importance of credit scoring and maintaining a positive payment history.
Set Clear Payment Expectations
Prior to giving a card to a child, set reasonable expectations as to how and when the child's charges will be paid. Does the child have a source of income? Can the child be held responsible to give you money for their transactions? Setting down some ground rules can help avoid trouble in the future.
Keep in mind that regardless of your agreement with your child, you will still be held liable to pay all the charges to the creditor. As such, you ultimately maintain responsibility on your account. Any missed payments will likely have a detrimental impact on your credit score, and possibly the child's credit as well.
When Do I Remove My Child as an Authorized User on my Credit Card?
While we want to teach children about responsible credit usage and the importance of credit reporting, we do not want to make them reliant on our help. At the age where you child becomes fully employed, or can otherwise handle their own bills, you will want to help them transition from your credit to their own. Most people will be ready to handle their own credit and finances by around the age of 23. It's important to set limits on the extend of your child's use of your credit, as that might actually hinder their ability to become financially independent.
Do I need a Credit Card Lawyer?
At our law firm, we help people that are overwhelmed with credit card debts. We provide defense from credit card lawsuits, help file for bankruptcy, and negotiation debt settlements.
We are dedicated to helping people eliminate their debt. If you need our help, call us at (888) 301-0584 or contact us online today.