Do’s and Don’ts for Parents of New Credit Card Holders
Whether you decide your teen is ready for a credit card or not, they'll need ongoing guidance on how to navigate the world of credit responsibly.
October 19, 2021
If you’ve been mulling a credit card for a child under 18 or adding a child to your credit card, there are a few options for getting started. But, not all teens may be ready for the responsibility. Teaching teens about the responsible ways to use a credit card while they’re under your roof will prepare them with good financial habits that benefit them for a lifetime.
Teenagers and credit cards
To get a credit card for a child under 18, your options are limited. Kids can’t get their own card until 18. But you can often add a child to your credit card as an authorized user (many credit card companies allow them). Teenagers can build credit in their own name and develop a credit history, so if this is important for your family, it may be worth exploring the minimum age limit for your card. The upside: your child benefits from your good credit score, and you can monitor spending. The downside: as the cardholder, you’re responsible for the bill even if your teen flubs their portion (but! a useful conversation starter).
Teens ages 18-21 have a couple of possibilities. The most likely option for someone with no credit history is a secured card, which requires a refundable deposit that guarantees the card and typically designates the spending limit. Deposit $1,000, and that’s the card limit. Your teen pays any monthly charges above that deposit like any credit card.
The other option is an unsecured traditional card. If a teen can provide proof of income, even part-time, they might qualify. Student cards come with lower limits designed for young users. Alternatively, ask your bank or credit union what they offer. This type of card is the most powerful for building credit but is also the easiest to blow up.
No matter which card your teen gets, they’ll need ongoing guidance on the best practices of how to navigate the world of credit responsibly. Learning how to use credit isn’t intuitive. Here are five smart moves to teach teens about using a credit card.
Credit card practices to build credit
Best practice #1: explain how credit cards work
Kids should understand they’re using money on loan. A debit card gives access to existing money in a checking account. Credit cards, in contrast, allow you to spend money you don’t have, and for that privilege, you’re charged interest if you only pay the minimum payment when the bill comes due. The billing cycle provides a grace period after the statement closes, but after the payment due date, interest accrues on any unpaid balance.
For example, if a teen pays just $25 per month on a $500 balance, they may pay $98.91 in interest over the two years it takes to pay off $500, according to Experian’s credit card payoff calculator (not including other possible fees). Explain the concept of minimum payment, compound interest, and why paying the balance every month is best.
Don’t: Assume teens understand what a billing cycle is. They don’t. Show them a statement with the billing period, statement closing date, compiled charges, and payment due date.
Best practice #2: define what a credit score is and explain its importance
Your credit score is derived from your credit report, which functions like a report card of your credit behavior. A credit score is kind of like a final grade for a class — except it can be improved. Different factors contribute to a good score, including payment history (35%), credit utilization (30%), a mix of credit (10%), and length of credit history (15%).
A good score sets you up to be eligible for lower interest rates on loans, approval on an apartment lease, and lower car insurance rates—all things that help teens when they fly the coop.
Don’t: Focus on factors that aren’t pertinent yet. Do highlight the importance of on-time payments and credit utilization. Credit utilization is the percentage of available credit you use. Limiting spending to 30% or less of the card’s limit optimizes your FICO score. But teens can still build a good score by spending, say, $20 per month. The goal is on-time payment history.
Best practice #3: teach teens to read the fine print
As you explore the best credit card for your family to use, guide your kid to read the fine print on possible fees, including the annual fee, introductory 0% annual percentage rate, regular APR rate, late fees, cash advance fee, or APR rate (it can be higher than the regular APR).
Don’t: Get too complicated. Make ongoing conversations the goal to avoid overwhelm. And if you don’t understand all the fine print yourself, learn together.
Best practice #4: set up autopay to pay the bill
Autopay ensures kids won’t miss a payment. Paying the full balance is the only way to avoid paying interest. On-time or early payments are key for building good credit. Even one 30-day late payment can reduce your credit score and raise your APR.
For a teen, the safest way to use a card is to charge a regular, small amount each month. Remind them to monitor their bank account for adequate funds to avoid overdraft fees and to ensure the payment is drawn on time. Set up email notifications or phone alerts for payments due or charges over a certain amount.
Don’t: Expect them to handle the set-up on their own. Set it up with them or review with them after they tackle it.
Best practice #5: outline how to stick to a budget
Once teens understand that credit cards aren’t free money, discuss the best uses of the card. If they treat it like a debit card and only buy within their budget, they won’t run into nasty surprises.
Don’t: Ignore your teen’s usage. Tell them you’ll be monitoring usage and payments to ensure they’re on the right track. If it’s not going well, you reserve the right to step in.
However, sometimes recovering from a mistake can provide for some positive learnings. If your teen misses a payment, they will have to pay the late fee and interest, and watch their credit score potentially drop. But they have time to rebuild with your guidance. As part of their services, many companies provide access to free credit scores, and teens can watch credit scores rebound.
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