As a parent, you’re tasked with supporting your child in developing solid life skills. Responsible spending habits and money-management skills definitely fall within this category. When it comes to credit cards, the consequences of irresponsible use can be serious. Other than going into serious debt and being unable to make repayments, credit cards can damage credit records and make securing home loans and other financings a major challenge.
Fortunately, instilling responsible credit card habits in your children doesn’t require complex financial lessons. Before your child enters the workforce and gains access to credit-based financial products in their own right, you can educate them and provide them with the financial awareness they’ll need to protect against the risks out-of-control credit-card use.
With the right guidance, you can ensure your kids have the essential skills to use credit wisely – before they hit young adulthood and the credit card companies approach them with offers. With this in mind, here are the top pros and cons of credit cards for kids and how to encourage responsible usage.
Why it’s Important to Make an Informed Decision
Credit cards offer a safe, convenient way of paying for things, whether you’re shopping online, buying in a store, or paying bills. They can come with security features for online shopping along with rewards and perks, and they’re more convenient than carrying cash. Credit cards are an essential tool in certain situations: some businesses — like hotels and rental car providers — only accept credit (and not debit) unless you’re willing to put down a deposit.
When your child becomes an adult and moves out, they’ll continue to be exposed to ads and offers from credit-card providers, cash loan providers, and other lenders with enticing offers. For example, in 2018 the average amount lent from short-term loan providers was $812, which was used to pay for things like emergencies, moving house, car breakdowns, etc. That’s why it is a good idea for kids to understand how credit cards and loans work. In that way, they will act responsibly, which will prevent themselves from getting into financial trouble.
So, when is the best time to introduce your child to the world of credit cards? You can start teaching your child about credit cards when they start showing curiosity about them or when they’re in their early teens.
Pros and Cons of Kids having Credit Cards
The advantages of allowing a child to use a credit card include building a credit history, responsible usage of credit, and learning to budget.
- Credit history: With responsible use, a child with a credit card can get started early on building a solid credit history.
- Using credit: Your child needs to understand how credit works and understand that it is not free money and each charge to the card is borrowed money from the bank. Learning to manage available credit responsibly is an essential money-management lesson. Kids can learn about how interest charges quickly accumulate with unpaid balances and the dangers of spending more than you can afford. They can be made aware of features like grace periods, annual fees, cash advance charges, complimentary insurance, and rewards.
- Impulse control: Credit cards give your child an opportunity to learn the difference between needs and wants and how to avoid irrational, impulsive purchases – while they still have you looking over their spending.
- Budgeting: Credit cards can teach children about budgeting, earning, saving, and careful spending. Kids can use their cards as budgeting tools by using statements to track and review how they’re spending their monthly limit.
Drawbacks of kids have access to credit cards could include the following.
- Misunderstanding credit: Without proper guidance, children might fail to understand credit cards are not an endless source of money and accumulate charges as if the balance doesn’t need to be repaid.
- Not understanding it’s borrowed money: If your child is too young to understand the concept of credit, they might not be able to understand it’s borrowed money from the lender.
- Unsupervised usage: A child who uses their credit card unsupervised could end up impulse shopping and racking up debt – which you’ll have to pay off for them.
Credit Cards and Kids: Responsible vs Irresponsible Use
What is a good example of the irresponsible use of credit cards by kids? Well, if your kids are charging expensive gadgets like a Playstation or Xbox without your approval and going beyond their allowed limit. One way to avoid these is to set up an alert so you’re notified if they exceed a certain threshold. Other examples of irresponsible credit card usage by kids is giving them large limits, not ensuring they pay off the balance every month, and leaving them unsupervised in how they use their card.
Examples of responsible use of credit cards are when the parent sets a modest limit on the card, such as $500 and regularly guides kids on checking statements and tracking spending. The child should be encouraged to pay off the balance each month from their pocket money, part-time-job earnings, and/or savings.
Another example of responsible use is adding kids as authorized users on credit cards. Parents will have full access to the statements and can involve kids in reviewing and tracking charge amounts and spending categories. As a parent, you can teach your children to charge recurring monthly bills (like phone bills) to the card. Alternatively, consider a debit card, as these cards use only the available balance, so your kids won’t be able to spend more than they have in their accounts.
Responsible Use can Set Kids up for the Future
Credit cards can be useful tools when they’re used responsibly. Teaching your child about credit cards is like any other basic life lesson: learning to drive, the risks of drugs and alcohol, or having a good work ethic. Given the sheer volume of credit card products out there, the best time for your child to start learning is when they still have you as a safety net, rather than when they’ve moved out and could be at risk of getting into debt. By letting your children learn by using, you could support them in gaining good financial literacy and becoming fiscally responsible adults.
Luke Fitzpatrick has been published in Forbes, Yahoo! News and Influencive. He is also a guest lecturer at the University of Sydney, lecturing in Cross-Cultural Management and the Pre-MBA Program. You can connect with him on LinkedIn.