Some parents will read that headline and eagerly answer “Never.” But read on. Getting your young adult a credit card could be a great opportunity for him or her to learn firsthand how to manage money and to start building a solid credit score for the future.
First, let’s look at some facts about young adults and credit. According to TIME Magazine (April 12, 2012), although 70% of undergrads and 96% of graduate students have credit cards, fewer than 10% pay their balance in full every month. Only 15% have any idea how much their interest rate is, and fewer than one in 10 students know their late fee and over-limit fee amounts.
With data like that, you’re probably less inclined than ever to give the green light to a child begging for a credit card. But beyond its role as a convenient payment method, a credit card, used wisely, can help your young adult build a solid credit score, something that will help him or her in future when it comes time to rent an apartment or get a loan.
The best time to consider getting a card for your young adult is when she’s about to go off to college. Credit card companies are eager (some would say too eager) to develop a relationship with college students, knowing that once a student has that card, she’s going to use it! But the upside is that students often get great rates – rates comparable to those people with very good credit receive – and some of the rewards that come with it. With low rates come low card limits, usually, but that’s a good thing in the long run because you don’t want to encourage rampant spending.
By law, if your student is under 21 either she needs a cosigner to get her own card or proof of her ability to pay, meaning evidence that she has at least a part-time job. If you decide you’re willing to be a cosigner, know upfront what you’re in for: you’re ultimately responsible for payments on the card, and if she makes a late one (or two or three), your credit rating will be negatively affected, too.
If you’re not willing to take on that kind of liability, there’s another practical option: have your child become an authorized user of your card. In this situation, even though you’re the primary cardholder your child will be building credit because her name is on the card, yet you have control to see all activity on that card – something you wouldn’t have if she had her own card. If you see activity that’s not prudent or she fails to make an agreed-upon payment, you can easily take her off the account at any time.
As an authorized user with your oversight, she gets experience making smart purchase decisions and the practice paying bills on time (and, ideally, in full and immediately upon receipt of the bill); what she doesn’t get is free reign to make costly mistakes.
Use This As A Teaching Moment
The best thing you can teach your kids about the use of credit, starting when they’re fairly young, is to 1) only put on credit what she can afford; 2) pay bills in full immediately upon receipt; and 3) get into her mind that credit is a convenience, not a source of spending money.
Before arming your child a credit card, be sure to also talk about late fees, annual percentage rates and details about how long it will take to pay off a purchase making only minimum payments. The more she knows about the prudent use of credit, the less likely she’ll be to get herself into a difficult debt situation.