Giving your child a credit card can be a way to begin their educational journey into the world of finance. Since we live in a credit-based society, responsible use of a credit card is an important lesson. If you begin early, perhaps you can help your child avoid some of the financial mistakes that have caused so many bankruptcies, foreclosures and credit disasters. The Dean of Fairleigh Dickinson University’s Business School, Andrew Rosman suggests that teaching kids about interest rates and debt at an early age will help them to become “financially literate adults”.
But, should you give your child a credit card in order to teach them responsible money management?
If So, When?
When your child reaches adolescence, it may be an appropriate time to assign them a family credit card that you keep in your possession. If they want to make a purchase and do not have the savings to fully cover the cost, offer to make up the difference with the family credit card. However, they must agree that when the bill comes in, they will pay you back for the amount charged. At this point you can introduce them to the realities of interest and late payment penalties.
Teenagers Can Take on More Financial Responsibility
Once your child hits his or her mid-teen years, such as 15 or 16, you can provide them with a credit card that they hold, but still on the family account. They should be required to pay all charges in full each month, or incur additional penalties and interest so they begin to understand the seriousness of irresponsible credit card use. Alternatively, give them a prepaid credit card, loaded with a certain level and afford them the freedom to monitor and budget their own spending. The same amount of allowance that you would normally give them can be the amount that is loaded onto their credit card. This will train them to be accountable to a limit and to prioritize their purchases.
The Benefits of Giving Your Child a Credit Card
A credit card can be a great alternative to providing your child with cash which could possibly be lost, or for those unexpected times when they need to take a taxi home for example. It gives them early exposure to the concept of credit and the need to be careful and responsible with credit card use. Early memories of needing to pay interest or late payment penalties to Mom or Dad could last them a long time and shape them into responsible credit users once they become adults.
The Risks
According to the 2015 T. Rowe Price Kids & Money Survey, 52% of parents surveyed felt that children should have their own credit card as a tool for learning how to manage money. In fact, the number of kids with credit cards has grown. In 2012 only 4% of kids had a credit card, while in 2015 11% have one. Yet only 21% of kids surveyed reported that they felt knowledgeable about credit. Less than 46% said that their parents were doing a good job teaching them about money. Maybe a credit card is not the way to go. Perhaps a better approach is to simply spend more time helping your child develop a healthy relationship with money and a factual understanding of how the financial system works. Be sure to include lessons about digital financing, such as online banking, crowdsourcing, peer-to-peer lending, bitcoin and other digital currencies and online payment methods.
Bottom Line
If you do not feel you have the strength to set rigid limits and expectations around your child’s use of a credit card, then it is not a good idea to give them one. However, giving your child a credit card can also be a great opportunity to teach financial literacy and shaping him or her into a financially responsible adult.
