Parents have to make a lot of complicated decisions, because they want to give their kids every chance to learn, have fun, and take advantage of healthy and helpful resources. But they also know that there are potential downsides to introducing kids to grownup tools too early in life. Children seem to be maturing – or at least getting older – faster in this day and age. Then, if they are fortunate enough, they head off to college. So it is no wonder that one of the most vexing questions that parents are now asking themselves is “When is it okay to let my child have access to a credit card?”
The Parental Age Dilemma
Going to college is a major rite of passage, and if your kids go off to college they will have, for the first time, a huge amount of independence. You’ll want them to be financially secure, and you’ll want them to learn how to make mature financial decisions so that they can succeed on their own – both now and in the future. Grownups may worry that an irresponsible or inexperienced child with plastic in their wallet could mess up both the child’s credit as well as their parent’s. They could misuse their financial independence and rack-up a lot of unmanageable expenses. But if young adults use plastic in a thoughtful and responsible way it will teach them timely lessons in financial literacy. They will have a head start establishing good credit, sticking to a budget, and making wise decisions about money.
Peace of Mind & Convenience
For most parents giving a credit card to a student who is heading away to college – or helping them apply to get their own credit card – is a good strategy because of the financial flexibility it offers. You’ll know that when your child is away from the comfort and security of home, they will still have reliable plastic to support them. If they need financial help and you aren’t around, they can just grab their credit card. Should an emergency strike and they need fast access to funds, they will have a way to receive them or will have some available credit that they can use. Responsible children will also have a method to start establishing their own credit, which will become vital once they are financially independent and need good credit to lease an apartment, take out a bank loan, rent a car, or apply for a job with an employer who checks credit as part of the hiring process.
Teaching Financial Independence
A credit card can be the ideal set of training wheels to teach a young adult how to make their way in the complicated world of modern finance. The key to success when getting your first credit card is knowledge and understanding of how credit cards work and what responsibilities the cardholder assumes. Don’t let your child make the mistake of seeing it as free money. Either teach them about such things as timely payments, interest charges, and credit history or make sure that they learn by taking a financial literacy class. Many colleges now offer those for free, and every student who has access to that kind of learning should take full advantage of it. If your child’s college doesn’t offer financial classes then you can have them learn online, from sources such as the Consumer Financial Protection Bureau – a government agency devoted to protecting and educating consumers.
Laws Governing Cardholder Age
So when is the right time to encourage a child to have a credit card? The federal government, in the interest of consumer protection and to prevent banks from preying on kids who are too young to handle having a credit card, has already made some of these decisions for parents and kids. As part of the legislative response to the credit crisis of 2008, laws were passed that prohibit young people from acquiring their own credit cards until they reach the age of 21. Exceptions are made for kids who are at least 18 and who have parental permission or can independently verify that they themselves earn enough income to pay their bills on time. Prior to the passage of this law that raised the age limit from 18 to 21, many kids were getting deeply into debt while still in high school.
Two Options for Minors
So if you send your kid off to college before they reach age 21, what are your options? There are a couple of things you do to ensure your child has a credit card, despite being underage. You can 1) add them to your own credit card account as an authorized user, or 2) you can co-sign an application for your child. If they are an authorized user, it is essentially the same as handing them your own credit card. They can use it to their heart’s content, up to your available credit limit. You will continue to get an itemized monthly statement, and only you will be held liable to repay any charges. If you co-sign for them, both you and your child will share the responsibility for repaying any charges, but you as their co-signing parent will not receive your own credit card and won’t receive monthly billing statements. So you won’t be able to as easily monitor how your child uses their card. But if the child defaults and doesn’t pay their credit card bills, the credit card company will demand payment from you as the co-signer. You will be legally and financially obligated to pay. Keep in mind, too, that credit card debt is so serious that it is generally not even protected by bankruptcy. So before you take this step, be sure that you and your child have a clear understanding of what it means.
Monitoring Credit Card Use
One of the strongest arguments for giving your child access to your own credit card for college is that such an arrangement makes it easier for you to supervise their financial activities. If your child off at college spends cash, you really have no way of knowing what they spend it on, because you cannot track cash. Sure, you can ask your child to keep receipts and an expense ledger, but we all know that even adults have trouble remembering all their expenses and saving every receipt. Young people who don’t want you to know what they are buying – whether it’s clothes they may not need or things they aren’t supposed to have like cigarettes or alcohol – can simply say they lost the receipt. But that isn’t a worry for parents whose kids have a credit card linked to their own account as an authorized user, because every single transaction – whether it for a dollar or two to buy a soda or thousands of dollars to pay tuition – is itemized. You can view those in the monthly statement and they are also archived for future reference.
Full-Fledged Credit Cards for Students
If your student is old enough and has started building some credit history, they may be eligible for their own credit card. In that case, a credit card designed with students in mind might be worth checking out. The Capital One Journey Student Rewards card, for instance, provides robust unlimited 1% cash back on all purchases and also give a cash back bonus each month that the credit card bill is paid on time. If a student qualifies for that added bonus then their cash back rewards are worth 1.25% - an incentive increase of a quarter of a percent. Students can select their monthly due date and get free access to their credit score, which is a great way for them to track the progress of their credit profile as they establish credit for the first time. “Discover It for Students” is another full-fledged credit card that has a very generous cash-back rewards program – and Discover wins many awards for excellent customer service. Students who carry the card earn unlimited 1% cash back on all purchases, plus 5% cash back in certain rotating categories that change each quarter. Discover will also give an extra $20 in cash back one a year to cardholders who maintain at least a 3.0 grade point average. There is no annual fee, no late fee on your first late payment, and if a student plans to spend a semester abroad they’ll benefit from the fact that there are no foreign transaction fees.
The Prepaid Credit Card Option
Students who don’t have credit or have poor credit can use a prepaid card option. Prepaid cards require that the cardholder deposit funds that they can then access with the card. In that way a prepaid card works sort of like an ATM card, because how much you can spend with it is determined by how much you first put in the account. But because you aren’t actually borrowing money from the card issuer, they card company assumes no risk. For that reason you can get a prepaid card even if you have no credit history or bad credit. That makes these a popular card for youngsters heading off to college. The downside of prepaid cards is that they charge various fees. For example there may be a monthly account service fee, fees for using it to load more funds, or ATM surcharges. Study the terms and conditions of each particular prepaid card you are considering to determine which one is most affordable and works best for you. Two examples are the Bluebird and the MoneyCard. The Bluebird Card from American Express is a prepaid card with lots of convenient features, and for those students who shop at Wal-Mart the Wal-Mart MoneyCard is an option that offers some cash-back rewards when you use it to make purchases at Wal-Mart. The MoneyCard is a MasterCard product, so it is also honored wherever MasterCard is accepted – and MasterCard is one of the biggest credit card companies in the world, so it is accepted in more places than American Express.
Secured Credit Card Options
A secured credit card is in a status that is more or less between a prepaid card and a standard credit card, because it works just like a full-fledged credit card but requires that the cardholder deposit funds into the account in order to activate it. If you use the card in a responsible fashion for at least six months, you can then apply for an upgrade to an unsecured credit card. A good choice in this category of cards is the Capital One Secured MasterCard, which has no annual fee and free access to credit tracking. You start off by putting up a security deposit of either $49, $99, or $200 in order to have a $200 credit card spending limit. The amount of the deposit is determined by your credit worthiness based on factors such as your history of other types of consumer loans.