With today’s complicated credit market, parents are often confused about when and how to best let their children learn to handle checking accounts or credit cards.
Some parents feel that their kid is old enough for a credit card when they begin college, some parents even feel that sooner is appropriate. Other parents feel that keeping their kids on a cash only basis is best, even for college students, especially if are not very disciplined, or as one mom said, her kid is a “free spirit.”
In 2010, a law went into effect limiting the ability of college kids to have a credit card. They either had to have a job that would qualify them to pay their credit card bill, or have a parent as a co-signer.
One argument for allowing a credit card for your child when they begin college is that it also will begin a credit history for them. But, parents who co-sign must be aware that if their kid misses a payment, their credit score is affected negatively unless they make it instead. However, if you have a good credit score and confidence that your child will follow the ground rules you set for putting them on your credit card account they inherit your FICO score – this is a real boost when they want to establish credit on their own.
If you are concerned that your child needs a limit, set your kid up with a credit card like the ones available from American Express such as their Green or Gold card. These cards have a feature where you can put a child on the account but limit their monthly spending. The biggest drawback is that there usually is an annual fee for this type of card.
Another way to keep your child’s spending in check is to get them a secured credit card. Once it has been maxed out there is no way for them spend more, unless you or they replenish it.
Financial pundit Suzie Orman thinks starting a child off with a credit card at 15 or 16 makes sense as long as certain rules are established. She suggests:
- Parents have to set a good example. If parents handle credit in a good way it is likely that kids will too.
- Their initial credit experience is better with a card tied to your account. Not only do they enjoy your good credit score, you see all the activity they generated by the card. In addition, you establish the rules: allocate a certain amount of money for things you are willing to take care of, everything else they must pay for themselves. When the bill comes, have your kid sit down with you and go over the statement with them. If they used the card for something you had not agreed to cover and they do not have the cash to pay you back, you have a great teaching moment. They will learn the painful lesson of running a balance.
- Get your kid a credit card of their own when they go to college. If they do not have a job then you will have to co-sign. Suzie suggests that you ask the issuer to keep the credit limit low, as you will be responsible if your college student runs up a balance.
Credit use ranks high on the list of things kids need to know to succeed in life.