According to T. Rowe’s survey, 17% of parents say their children aged 7–18 have credit cards. If your child isn’t among them, you might be wondering, “Why do some teens have credit cards?” You’ll want to be sure that your child isn’t missing out and has the same opportunities as their peers.
There are several benefits to your child having a credit card, which you’ll learn about in this guide. You’ll also see the risks to such financial independence so that you have the full picture.
Before we dive into the details, though, we must clarify an important matter—how can your child get access to a credit card in the first place?
How Can Teens Obtain Credit Cards?
While it’s technically possible for a teen to take out a credit card if they are a legal adult, it’s not particularly common. Because of the CARD Act of 2009, young adults under the age of 21 can’t get a credit card unless they demonstrate an independent ability to make payments. Minors (under 18 years old in most states) can’t apply for a card by themselves at all, so only teens aged 18–19 might obtain it if one of the two CARD Act conditions is met:
- They earn a stable income that allows them to make payments
- They have a co-signer who is over 21 and can assume responsibility for the card
The aforementioned survey still showed that minors use credit cards, so you’re probably wondering how this is possible. The only way for a minor to access a credit card is if a parent has authorized them to use theirs. You can add your child as an authorized user if your bank allows it, and they will either use your card or get their own (connected to your account).
Whether this is the case or your teen is a legal adult meeting the CARD Act requirements, there are a few good reasons they should have a credit card.
Why Should Teenagers Have Credit Cards?
The main arguments in favor of teens having credit cards include:
- Learning financial responsibility
- Having convenient access to funds
- Building a credit history
Credit Cards Can Help Teens Build Healthy Spending Habits
Your child will need to learn many skills while transitioning into adulthood, and proper financial management is among the key ones. There’s a high chance they’ll take out bigger loans later in life, so giving them access to a credit card is a solid introduction to using borrowed funds.
With the right guidance, your teen will learn to:
- Prioritize repayments
- Read billing statements
- Be frugal with funds
It’s best if your child gets a credit card while still living with you so that you can monitor their spending more closely. You’ll have to play a more active role in the early stages, so help your child build a strong foundation before giving them more independence.
Your Child Will Have Access to Funds When You’re Not Around
While a cash allowance has been the easiest way to give your child money, it has many limitations:
- It can’t be used for online purchases
- You can’t give your child money unless you’re with them
- Carrying cash around all the time can be inconvenient
A credit card can be a great alternative, as they don’t have to ask you for money every time they want to buy something. By giving them access to your card, you’ll make your child more independent while still having an insight into their spending.
More importantly, your child will have an emergency fund they can access in case of any trouble, which will bring you both some peace of mind.
How Credit Cards Help Your Child Build a Credit Profile
A credit card will likely be your child’s first financial product enabling them to establish a credit profile. In most cases, your child will start as an authorized user of your credit card due to the strict regulations preventing them from taking out their own.
When you add a child to your credit card, they’ll get a credit file connected to yours. If your credit profile is clean, this can be an advantage because your credit history will be included in their file, helping them secure a high starting credit score.
While this approach may work well in some cases, it can be quite risky. If your child is an irresponsible spender, they might damage your credit profile, and vice versa. Any defaults and other issues will show up on both credit reports, so discipline is key.
Besides, when you remove them from the card, all credit activity associated with your card gets erased from their credit profile. Your child essentially piggybacks on your credit profile instead of establishing their own, so they’ll have to build it from the start after you remove them.
We’ll show you a more risk-free and convenient way to help your child build credit later in this guide. Before that, let’s go over some disadvantages of giving your child access to a credit card.
Why Teens Should Not Have Credit Cards
Take a look at some of the reasons why entrusting your teen with a credit card may not be the best idea:
- Risk of reckless spending
- Less control over borrowed funds
- Potential long-term damage to the child’s credit report
Credit Cards Can Lead to Irresponsible Spending
Without prior financial education and discipline, your teen might see a credit card as free money. This happens for two reasons:
- They can’t see the money going out, which creates a distorted image of how it’s spent
- There’s no immediate consequence of overspending, as all related issues will show up later on the billing statement and/or credit report
Unless you set and enforce strict rules, your child might use the card to splurge on unnecessary items. To counter this risk, demonstrate healthy spending behavior and make it clear that credit funds should only be used when necessary.
A Lack of Control Can Lead to Excessive Debt
Whether your teen is an authorized user of your card or has their own, this is a significant transition from giving them an allowance, and it carries certain risks. The card might let them stack up large amounts of debt, which you retain full liability for because authorized users aren’t held accountable.
Even if your child has their own card, they’d most likely turn to you for help if they maxed it out. As much as you’d want them to learn a lesson, there’s a high chance you’d end up helping them repay the debt.
This is why you might want to hold off on giving your teen access to a credit card until they’ve proven themselves reliable. Besides having the money talk, you can lend them some funds so they can practice responsible spending before getting the bank involved.
Credit Card Misuse Can Make Future Loans Harder To Obtain
If your child doesn’t learn proper credit behavior early on, giving them a credit card can enable costly mistakes. Negative credit activity can stay on their report for up to seven years, hurting their chances of getting new loans in the future.
The following table gives examples of such behavior and how it can affect your child’s credit score:
|Issue||Impact on Credit Score|
|Missed payments||Any payment made later than 29 days from the due date is recorded and lowers the credit score because it shows irresponsibility|
|Excessive cash advances||Frequent cash advances indicate poor financial management and increase credit utilization, damaging one’s credit profile|
|Frequent credit inquiries||Opening new credit accounts or making hard inquiries too often signifies a constant need for access to credit, which lenders see as a risk|
As responsible as your child may be, their credit profile is too important to leave anything to chance. FreeKick can help jump-start your child’s credit profile and score without the risk of your teen damaging their file through poor spending decisions.
How FreeKick Helps Parents Build and Monitor Their Children’s Credit
Powered by Austin Capital Bank, FreeKick is a combination of a Federal Deposit Insurance Corporation-insured (FDIC-insured) deposit account and additional services that lets parents establish and build their child’s credit profile on autopilot.
You can create your FreeKick account and get started in three steps:
- Make a Deposit—Choose a plan and make a one-time FDIC-insured deposit with a 12-month commitment
- Set It and Forget It—When you open the account, FreeKick will build 12 months of credit history for your child with no ongoing actions required from you
- Keep Growing—When the subscription ends, you can renew it for another 12 months or cancel it and get 100% of your deposit back
You can choose between three plans based on the deposit amount:
|FDIC-Insured Deposit Amount||Plan|
Your child will start building a credit history as soon as you open the account. If they’re a legal adult (18 or over in most states), FreeKick will start reporting their activity to the three nationwide consumer credit bureaus (Equifax, Experian, and TransUnion).
FreeKick can also build a payment history for minors (14–17), but it will be reported once they reach the age of majority, as credit bureaus only accept reporting for adults.
You can cancel the account at any point without penalties and get your deposit back. Note that if you cancel the subscription before your child becomes a legal adult, the credit history for the account cannot ever be reported.
FreeKick’s Credit Profile Monitoring for Children and Young Adults
Child identity fraud is among the biggest issues in our financial system affecting one in 50 U.S. children. As minors’ identities aren’t monitored by the government and other institutions, criminals can use them for synthetic identity fraud. They combine real information—like a child’s Social Security number (SSN)—with a fake name and other details to forge a new identity and defraud lenders.
Besides checking your child’s credit report or freezing it, there’s not much you can do to protect your child from the many consequences of identity fraud. FreeKick can help you minimize the chances of it occurring in the first place through advanced credit profile monitoring.
To build a strong foundation for your child’s adulthood and mitigate the risk of identity fraud, sign up for FreeKick.
Featured image source: JESHOOTS-com