Teaching your kids how to fail is one of those underrated parenting skills.
By making mistakes in a controlled, safe environment, kids can learn coping skills before they incur real-world consequences. That’s particularly true when it comes to teaching kids about finance.
Those lessons can have an important impact on your child’s future. A Penny Hoarder survey found that one-third of adult respondents did not grow up discussing basic personal finance topics, such as credit scores or debt. The result? For those with no early financial literacy, 40% had no savings at all, compared to 17% for the group that did discuss finances.
One important lesson that you can teach your kids is how to use credit responsibly — before they get credit cards of their own.
Wondering if you should get your pride and joy a credit card? Here’s why and how to do it so they can learn how to handle credit responsibly.
Should Your Kid Get a Credit Card?
Although it might not seem like a priority, getting your child a credit card helps them build credit history.
You can help protect your child’s credit score from identity theft by checking their score periodically, or at least by the time they turn 15, when the score may become more relevant.
Credit history makes up 15% of your credit score, which will become important to your kids in the future if they want to finance a car, buy a house or possibly even get a job. And unlike other factors — like credit utilization or credit mix— there’s no way to improve your credit history other than with time.
But simply allowing your child to sign up for a credit card presents two problems:
They may not be ready for the responsibility of handling credit and could end up thousands of dollars in debt, thus wrecking the credit score you wanted them to build.
They probably can’t qualify for a card … because they don’t have a credit history.
That’s where you come in.
You can cosign on your child’s credit card or even consider adding your child to your credit card to build credit. Which one should you choose?
Should You Be a Cosigner or Make Your Child an Authorized User?
Choosing between becoming a cosigner or making your child an authorized user starts with their age — you cannot apply for a credit card until you’re at least 18 years old, so that’s the earliest age you could be their cosigner.
But becoming a cosigner on your older teen’s credit card makes you legally responsible for the debt if they miss a payment, according to Todd Christensen, an Accredited Financial Counselor and education manager with MoneyFit.org.
“The problem is, cosigners are not usually 100% involved in the billing process — they do not see, typically, the monthly bill,” he said. “So often, a cosigner will be contacted six to 12 months after a payment is missed, and then be requested to make all the back payments plus fees, and this is in the meantime hurting their credit.”
The CARD Act of 2009 made it more difficult for people under 21 to get a credit card. However, there are plenty of cards that are marketed specifically to college students who can prove they can pay.
Adding your child as an authorized user means they aren’t receiving the privileges (or reward points) of having their own card — they’re essentially just carrying your card. For most issuers, an authorized user doesn’t even get a separate credit card number.
That also means your kids are depending on your credit history to build theirs. If your payment record isn’t so great or you have concerns about your ability to keep up with your credit card balance, you way want to consider the cosigner option when your kids get older.
But if you’re ready to teach your kids by showing them what a responsible card holder looks like (that’s you), adding them as an authorized user is the better choice. Here’s why.
Adding Your Child to Your Credit Card to Build Credit
By adding your child as an authorized user on your card, they can learn to handle a credit card in a low-risk way.
“It’s a great opportunity to build credit,” Christensen said. “It doesn’t cost [parents] anything. It doesn’t affect their credit at all.”
The minimum age for adding your child to your credit card depends on your credit card company — many have no minimum age requirements at all — and some premium cards charge a fee for adding an authorized user, so check your issuer’s terms and conditions before adding your child.
Seven years is typically the amount of time needed to establish a good credit history, so adding a very young child as an authorized user won’t do much to help their score.
“I typically recommend it especially in the late teens,” Christensen advised.
You can track your child’s spending instantaneously by setting up text alert messages for all credit card transactions or less frequently by checking your account activity daily.
Still unsure if you can trust your kid with the plastic? You don’t actually need to tell them they’re getting the card.
“I’ve done that with my own kids,” Christensen said. “I had them as an authorized user on my wife’s and my card for several years, and they never knew it until they turned 18.”
Even though his daughter wasn’t aware she was building her credit history, Christensen noted that she ended up reaping the benefits of having that credit history.
“When my daughter went to apply for a car loan after she moved out, one of the credit ratings had her in the 700s because she was an authorized user on our accounts,” he said.
Additionally, if you’re using the card to teach your older kids about handling credit cards responsibly, by allowing them to be authorized users on your card, they can reap the benefits of building credit — and make a mistake without putting your own score in danger.
As long as your child uses the card responsibly, don’t remove them as an authorized user until they get their own credit card and have had a few years to build that credit history.
“If their credit goes south, it should not make it onto [your] credit rating,” Christensen said. “But even if it did, a simple dispute online will have it removed.”
Ready to give your kids the chance to learn but aren’t sure where to start? Check out The Penny Hoarder Academy’s Credit Cards 101 course and this post on how to use a credit card as guides for teaching them about using credit in a responsible way.
Tiffany Wendeln Connors is a staff writer at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.