Knowing how to establish and responsibly manage credit is an essential part of money management, one that many people don't learn until they are on their own. Providing kids with access to a credit card may sound like a recipe for disaster, but it can actually be an excellent way to help kids start establishing credit and help them become better prepared to handle credit when they're older.
First of all, keep in mind that you shouldn't be opening a credit card up for your 8-year-old. Credit card access is recommended for kids once they hit the teen years when they're better prepared to understand the ramifications of credit card use.
If you are considering introducing credit cards to your children, it's important to understand the pros and cons first. Potential drawbacks of allowing kids to have their own plastic include:
On the other hand, providing kids access to credit cards can also be beneficial in a number of ways, such as:
If you do decide to provide a credit card to your kids, there are several ways you can allow kids to use and build credit in their teens.
Many financial experts recommend signing teens up with a secured credit card. A secured credit card works just like any other credit card, but uses cash as collateral that acts as the credit limit. This is an excellent way to help children develop credit because it automatically limits the amount spent.
You can also consider co-signing a credit card for your child. If you're going to do this, however, be careful to set and enforce limits and closely monitor statements.
A gas credit card is another excellent way to help your kids establish credit. This type of credit card also ensures that your driving teen will always have a way to pay for gas.
In order for credit card access to be beneficial for kids, it's important for them to understand interest, monthly payments, credit scores, credit limits, and paying bills on time. Sit down with your kids and go over monthly statements so they see just how much money they will pay in interest if they don't pay off their balance each month.
Additionally, it's also crucial to discuss the importance of paying their credit card bill on time to avoid dings on their credit history.
Providing kids access to a credit card can be a great way for them to establish credit history and learn more about credit. Just be sure to place limits, monitor use, and use the card as a teaching tool to help illustrate the importance of using credit cards wisely.