Kids and credit cards simply do not mix, so says an article by Janet Bodner, Editor of Kiplinger’s Personal Finance. Bodner writes, “Giving your teens credit cards is like letting them use drugs early so that they won’t turn into addicts. I’m all for learning to use credit responsibly, but having a card to practice on isn’t the way to do it. “[1]
The point Ms. Bodner makes is that kids need to learn how the movement of cash itself works, first by accumulating the actual cash and coin and seeing how it disappears when they spend it. A checking account is the next step, so the child can see the movement of cash on paper.
As for credit cards, “Kids won’t get it. To them, plastic is magic money. Credit cards, debit cards, prepaid cards – you name it, they’re all just a direct line to Mom and Dad’s wallet.” Even college students are too immature and irresponsible to be given credit cards, in Ms. Bodner’s view.
Coincidentally, Ms. Bodner’s 16 year old son describes how credit cards provide opportunity for spending. “If I don’t have cash, I can’t buy stuff I don’t need. With a credit card, I can buy anything.”
Another view is that the credit card should be an instrument in teaching kids how to manage credit. Children under 18 must have a parent or legal guardian’s permission to obtain a credit card. According to a 2006 study by the JumpStart Coalition for Personal Financial Literacy, 51.6 percent of high school students use credit cards. [2]
Parents have four options parents that give their kids access to credit:
- Co-sign for a new credit card in the child’s name.
- Add the child as an authorized user to an existing or new credit card account.
- Get a prepaid card.
- Set up a debit card attached to a checking account, or secured card tied to a savings account.
Co-signing or adding a child to a parent’s account means that an unpaid balance can hurt the parent’s credit score. A secured card may have higher fees, but can also help a child set up their own credit rating. Prepaid cards are the least risky to the parent because they have no overdraft fees and do not affect credit scores. Debit cards may be a good way to transition over to using a credit card, although overdraft fees can be expensive.
The key, according to Michael McAuliffe of Family Credit Counseling, Chicago, is working with your child to ensure they keep tabs on spending and by monitoring their account. McAuliffe says parents need to specify the ground rules, and insist their child pay the balance off each month, or have a good reason not to. Funding the card from the child’s earnings or allowance is another way to teach the child money and credit management!
[1] http://www.kiplinger.com/columns/drt/archive/2005/dt050217.html
[2]http://www.creditcards.com/credit-card-news/credit-cards-kids-under-18-1279.php
I have to agree that kids need to learn to value/appreciate money and understand that it just doesn’t come out of thin air. Growing up I always used cash and that helped me realize how much each thing you buy actually costs, instead of just swiping a card and worrying about it later.