The idea of handing over a credit card to your child can be as nerve-wracking as handing over the car keys for the first time—but both represent a vital skill your child needs to learn on the path to adulthood. The new credit card legislation now makes it illegal for minors who are under 21 to sign up for a credit card without a parent acting as a co-signer. Considering the fact that credit companies have been targeting college students for years—including such questionable practices as giving away free swag on college orientation weekends in return for signing up for a card—this law will help keep many kids from getting themselves into financial trouble. It also provides parents with a built-in safety net when introducing their children to credit for the first time.
When to sign your child up for a credit card is going to be different for each family. However, your child should be bringing in some kind of income and generally responsible before you entrust him with his own credit card. Here are some other ways to make sure that your kid’s first credit card is a learning experience, and not a financial nightmare.
1. Do your homework! It’s important that your child’s first card be one that you have researched together, rather than whatever card offer comes in the mail. You want to find a credit card with no annual fees or application fees with a fixed interest rate no higher than 17%. Choosing a card that offers perks like 1% cash back for education, like the Citi Upromise card does, can also be a good idea, although it’s important that your child understands that’s a perk and not a license to spend.
Good options for a kid’s first credit card. We recommend credit cards with low interest rates and cash rewards. Many student credit cards fit this criteria. Also check out secured credit cards as another option. These require a deposit and may have fees, but they are good for people with no credit history and can be a good tool to help establish credit and learn how to use it properly.
2. Treat the card as a way to build a credit history. Since this will help to put your child on the path to a good credit rating, it’s important that you both view this as a tool for that future credit rating rather than as an easy source of funds. That means not charging more than she can pay, paying off the bill each month, and not allowing the balance to become more than 30% of the credit limit. By getting into the habit of always living within her means and paying off her bills each month, your child will build an excellent credit history that will help her throughout her life.
3. Go over statements together. For the first six months or longer, use the monthly statement as an opportunity to talk about your child’s purchases. This is a good time to talk about what makes for good credit card purchases and what purchases are not as wise. It’s also an excellent opportunity to talk to your kids about your own money and credit habits, as well as any mistakes you may have made in the past. It may feel a little odd to sit down over the statement each month, but think of it as the equivalent to riding shotgun with your new driver. You wouldn’t want a new driver to go out without an experienced driver in the car, and you don’t want a new consumer to charge without an expert on hand. These conversations can help your child to learn and understand how best to control his finances.
Talking about money with your children can be somewhat awkward, but both you and your child will be glad that you guided her into the world of credit, rather than throwing her in.