To young and inexperienced minors (we’re talking about those under the age of 18), money may not carry the same value to them as it does for you. But, inevitably, there will come a day when your child comes up to you and asks, “Can I get a credit card?”
At the moment, the only way for anyone under 18 to get a credit card is to become an authorized user of an existing credit card account — that is, your credit card account. It introduces your kid to the world of adult finances, while also helping to build credit. Although there are great benefits to giving a credit card to a minor, you will understandably consider the risks too.
Let’s take a look at these risks and we’ll show you smarter — and safer — ways to provide those same benefits to your child while avoiding some scary financial pitfalls.
1. Your credit is at stake
When your child becomes an authorized user under your credit card account, he or she gets a credit card to make purchases just like you can. If your minor goes on to rack up a huge balance during a spending spree, you’ll find that your credit score may take a dip.
Here’s a scary fact: Authorized users are not responsible for payments — the primary cardholder (you) must make the payments. Failing to make payments will have an extremely negative impact on your credit!
What you can do about it: Set a spending limit on the authorized user’s card. (Not all card issuers offer this feature.)
If you have a $10,000 credit line, for example, you can restrict the spending by the authorized user to much less than that amount. For instance, American Express allows primary cardholders to cap the spending limit on authorized user cards starting at $200. This way, you ensure that your child won’t overspend because their authorized cards will be declined after reaching that spending limit.
Call your credit card issuer to see if you’re able to implement spending limits for authorized users.
2. Child not knowing the value of a dollar
Speaking of overspending, a credit card isn’t necessarily the best way to teach good money-management skills to your minor. The “pain” of spending is often absent for children when you’re the one paying the bills as they swipe away on your credit card account.
Let’s face it, many grown adults have trouble trying to control their own credit card spending. Can you really expect the typical teenager to have a solid grip on their finances?
What you can do about it: Give a prepaid card to your minor to teach them responsible spending before moving onto a credit card.
Prepaid cards are debit cards without the linked bank account. So, when your child spends money, he or she is watching actual money disappear from the account (let them feel how much it hurts!). For an allowance, you can deposit funds into the prepaid card and leave it to your child to decide how it is spent.
More importantly, prepaid cards are not linked to your credit whatsoever — don’t worry about them having any effect on your credit scores.
I recommend the American Express Serve® prepaid card because it has few fees and easy-to-avoid fees. Plus, you can create sub-accounts for other people (they each get a Serve card) to hand out allowance and restrict their spending. There’s no surprise why the Serve card topped MyBankTracker’s list of the best prepaid debit cards.
3. Losing track of child’s purchases
You know where your money is going when you pay for a child’s school supplies and educational expense. But, outside of that, do you know what your child is buying with his or her discretionary allowance?
Sure, with an authorized user credit card or prepaid card, you can log in online to review the transactions that your child has made.
For a credit card, you can review transactions on the account from the monthly statement. However, prepaid card issuers might not send monthly statements to customers. It depends on the prepaid card issuer, as some will charge you for paper statements.
What you can do about it: Establish account alerts through the card or through personal financial management tools like Mint.
Major credit card and prepaid card issuers allow cardmembers to create account alerts for certain types of activity on their accounts. To monitor your minor’s spending, for instance, you can opt to receive an email, text message or mobile notification when a card purchase exceeds $50 (you can set the amount you’d like).
You can do the same thing with money management tools like Mint, which allow you to link all your financial accounts to one place. After logging into Mint, you get a look at your entire financial setup, including your child’s card transactions.
Protect yourself first
Many financial gurus will advise against giving a credit card to a minor because the risks often outweigh the benefits. It is very similar to cosigning a loan, where you are liable for repayment if the borrower doesn’t pay — your credit is in danger.
With the above steps, you can minimize or even avoid the potential for financial damage to your own credit. After that, it’s a matter to keep a closing eye on your child’s spending habits before moving up to an actual credit card.