Should you give your kids access to your credit card?
Handing over your credit card to your teenager might not seem like a good idea.
But it might actually be a smart financial move. Not only can it help kids learn money management skills, it can also help their credit score.
Adding a child as an authorized user on a parent’s credit card can give the child a boost when it comes to establishing a strong credit profile. That is, as long as the parents are in good credit standing.
“Only do it if parents have good to excellent credit in the first place,” said Lynnette Khalfani-Cox, author of Perfect Credit. “There is no point in piggy-backing off someone with bad credit.”
Good credit habits like on-time payments, not taking on too much debt and having a long credit history, are likely to have a positive impact on an authorized user’s credit score, according to FICO, the leading provider of credit scores.
“The precise impact of authorized user information on the score will vary, depending on both the information contained in the authorized user account, as well as the make-up of the consumer’s credit file as a whole,” said Ethan Dornhelm, vice president of scores and analytics at FICO.
A good credit score can bring many advantages to a child once they enter the real world. It can eventually help them score the best interest rates on loans, qualify for an apartment, get better insurance rates and open their own cell phone plan.
But parents should be warned: They take on all the risk when adding an authorized user. The child will have the same spending power as the account holder, but none of the payment liability.
“The kid will bear no responsibility legally for paying off those balances, it all falls onto the parent,” said Matt Schulz, senior industry analyst at CreditCards.com.
That’s why experts stressed the importance of immediately establishing ground rules and expectations with children if they’re given spending power.
“Have a very upfront and very honest conversation before you hand over the card, so everyone knows what the expectations are and what the responsibilities involved are,” advised Shultz.
Parents should be very specific with when, how much and under what circumstances a card can be used and who will pick up the tab for the kid’s charges, added Khalfani-Cox.
Some parents hold the child accountable for their charges while others give a monthly spending limit.
Keep in mind that parents don’t have to hand over the card at all. While credit card companies will send the authorized user a separate card in their name, some parents might choose not to give it to their child.
Khalfani-Cox added her 19-year-old daughter as an authorized user on one of her main credit card accounts last year, but when the card came in the mail, she tucked it away in a drawer.
The move worked. Her daughter, who is still in college, has a credit score in the high 700s.
“I was able to give her a great start in the credit world and teach her about the prudent use of credit in a way that set her up for something larger.”
She plans to eventually add her teenage son as an authorized user as well.
Credit cards vary on their eligibility requirements of authorized users. Some cards require an authorized user to be at least 15 years old, while others don’t have any age limit.
When it comes to credit history rubbing off, the date the parent opened the card will be reflected in the child’s score, explained Dornhelm.
Along with spending rules, parents should also talk to their kids about the proper use of credit and its long-term impact.
Parents that don’t want to take the risk of adding a child as an authorized user can instead opt to open a secured credit card in their child’s name. Secured cards tend to require a deposit that then becomes the spending limit of the card.
These cards can help build credit, but there’s less risk of overspending.
“That person is building their own credit history as opposed to piggybacking onto someone else’s,” said Schulz. “Mom or dad can put down $200 or $250 to establish the credit limit and that would basically be all the risk they would have. It is a way helping your kid build their own credit history without making things any riskier than they need to be.”