Should you give your kid a credit card? It's a controversial question hotly debated between differing camps of parental mindset. On one side - it's never too early to teach financial responsibility - and the dangers - of credit cards. On the other - handing kids the plastic teaches them entitlement rather than a responsibility - and watch out when they hit the mall.
Exploring The Dangers
Bluntly put: credit cards and kids are a dangerous mix for two reasons. Credit cards teach kids the "buy now, pay later" mentality - and that can prove addictive. Marketing campaigns aren't shy about targeting youth in the hopes that they’ll spend more and more. The combination of the two can be costly - and often leads to maxing out. While some parents (like mine) take the “live and learn” attitude, with credit, learning the hard way can be an unwelcome financial burden – a lesson that can take years to pay off and have real financial detriment.
But that's not to say it's safe to keep kids in the dark about credit. Because of these reasons, it's vital to walk your kids through their first years with credit until they’re ready to go out on their own. What they’re taught now could be what totally saves them later.
Helping Kids Get Credit
While the bank says that primary credit card holders must be the age of 18 before they can apply, there’s nothing stopping kids from piggy-backing off of their parents' plastic. Unsupervised, this is obviously dangerous, but if properly done, kids can learn lifelong money management skills that are sure to get them ahead. Want to learn more about basic money management? Click here.
Learn Debit Before Credit
The generally accepted age for a youth to begin carrying a card in their wallet is during high school - and that should be a debit card. The use of a debit card will help them to learn the essentials of how to manage the money they have. As a first step towards credit, parents may eventually want to help their child get overdraft protection.
For teens, a good starter card is a gas card, like the MBNA Smart Cash MasterCard credit card. While the card will likely be in the parent’s name, it gives the teenager an opportunity to experience credit without the risks posed by the mall. Although gas stations now have mini marts in them, they still aren’t as risky as regular cards because buying options are significantly limited.
PS: Get approved for the MBNA Smart Cash MasterCard credit card and we'll give you a free $75 gift card (and enter you to win free gas for a year!) - whether you let your teen fill up with it - or keep it all to yourself - is up to you!
Credit Card Baby Steps
Considering your child’s level of maturity, the generally accepted age for getting a first credit card is after high school graduation. Ideally, this first card should have a low interest rate and no annual fee. A great learning exercise is to compare cards together and see which one works best for their needs. Discuss rates and rewards - and be sure to go over that fine print.
Why Credit Cards for Kids Can Be a Good Thing
- It helps them build good credit. Most parents think that the sooner their child gets a credit card, the better their score will be in the future. In reality, only 15 per cent of your total credit score is determined by how long you’ve had the card. The rest is determined by debt load, payments made, and timeliness of those payments. Keep in mind though - getting your child a card too soon could lead to an irresponsible credit mess - so make sure you do so only when they’re truly ready.
- You can teach them how to avoid impulse purchases. A really good way of teaching your child how to manage credit is by examining their monthly purchases with them. Take the time to talk about each purchase. Was it necessary? Force them to make the entire monthly payment. It will help them to learn to avoid two very bad credit card habits – high balances and late payments.
- You can provide them with a safety net. Making a mistake while learning about credit can be costly in more ways than one. An unpaid balance doesn’t just result in high interest - it also results in a bad credit score, something that can take seven years to repair. As a parent, you can provide your child with an important financial safety net, ensuring that the mistakes they make don’t last forever.
- You can teach them healthy spending habits. It’s incredibly easy to get overwhelmed by debt, especially when you’re young.While rationalizing the cost now might make sense, it won't be any less difficult to pay if off later. As a parent, you can play an important role in your child’s first experience with credit. Teach them the difference between needs and wants and show them just how easy it is for credit card debt to get out of control.
Cut Them Loose - With a Lesson
Once you’ve walked them along for long enough (generally speaking, until they graduate from college or university at the age of 21 or 22), the time will come when your child becomes financially independent. Knowing you’ve taught them everything you can and provided a safety net when they needed it can make it less daunting to let them go. You should feel secure knowing that your child has successfully learned to manage their money well.
