Getting your kid’s first credit card is important. Therefore, helping them build credit with responsible credit use is a wise parenting move. With the right guide, you can help your child develop the skills and know-how on how to become a credit-savvy adult.
Why Should You Get Your Minor a Credit Card?
Credit cards are a medium of paying for things. However your kids may not understand this, so you have to talk your kids through the basics. By showing them a statement and defining all the terms in black and white for them to understand. You have to explain to them what annual percentage rate (APR), statement balance, credit limit, available credit, and minimum payment due and so much more.
You can explain the fees as it relates to the account. Furthermore, you show that if the balance is not paid off in full every month, the interest will affect the balance.
Once your kids know how a credit card works, you should explain credit scores as well. Explain how they can impact your ability to take out a loan, get a mortgage, rent an apartment, or even get utilities in your name. They should be made to know that a good credit rating is important in your life. Thus you have to impress upon your child the need for building credit and staying in good standing.
Experts advise that parents take a training-wheels approach before giving their kid a credit card as well as the ability to make a major financial mistake. Parents should start by setting up a debit card. This should be a specific amount that your kid can spend over a period of time. Once your child demonstrates responsibility and good credit habits, you can move them to a credit card.
Start with a Secured Credit Card
Starting your child with a secured credit card, means you get a credit limit which corresponds to a deposit. This means that for a $500 deposit, you’ll get a $500 credit limit. As your child uses and then pays back the money, your child demonstrates fiscal responsibility and will learn that having credit does not equal spending without limits. The advantage that a secured card has over an unsecured card is that your child will be building a credit history by using the card, as compared to a debit or prepaid cards. After a period of time, the bank will likely move your child to an unsecured card.
Limit the Number of Cards
Applying for and getting more than one card may create a hard-to-track pile of payments. You may also be clueless of the total sum due at any given moment, or simply too much temptation. When your child uses multiple cards irresponsibly, it will hurt your child’s score, the same as applying for many credit cards in a short period of time. Thus it’s best to start your child with one card and keep things simple. Allow more responsibility as he/she proves him/herself.
Keep the Limit Low
If you keep a reasonably low limit on a credit card, you’ll avoid creating too much spending freedom for your child, which prevents him from making a major financial mistake. You must also ensure that you explain to your child how the credit utilization rate which is the percentage of available credit that’s being tapped works and how it will affect their credit score. A low utilization rate – 30% or less, is a major factor in having a healthy credit score.
Benefits of Getting a Credit Card for a Child Under 18
Here are some benefits that come with giving your under 18 children a credit card:
- It helps your child establish a credit history. Since any credit account that lenders report to the three credit bureaus can affect your credit, then if your child is heading to college in the next few years, establishing a credit sooner or later can be of immense help to them.
- It could help you teach your child about smart credit card use. If you teach your children about responsible credit card use, they’ll be less likely to make mistakes out of ignorance.
- Your child can use their credit card during emergency situations.