You’ve taught them how to walk, how to ride a bike and how to drive. Is it now time—as your child heads off to a college campus—to teach them how to use a credit card?
“Giving your child the ability to learn from you, about how to manage their finances and credit while building a credit score for when they are on their own after college, is one of the best gifts you could give them,” says Alicia Butera, a certified financial planner in San Diego.
Here’s how to get started.
Will your child qualify?
Age:To curb credit card debt among young people, the Credit CARD Act of 2009 made it harder for those between 18 and 20 years old to open a card on their own. Your child must have proof of individual income to qualify, according to the law. Most issuers only require applicants to put down their salary on the card application, but others may ask for documentation of proof, such as pay stubs. If your child doesn’t have their own income from a job, then someone who is at least 21 years old must co-sign the credit card with them.
If you co-sign a credit card with your child, you both must agree on how the card can be used, what purchases can be made and how much can be charged each month. Both of you are legally obligated for making payments. That means if your child goes on a spending spree with the card, then you are just as responsible for that balance as your child. Any missed payments or other negative items from the card will also affect your credit score along with your child’s. If, down the road, you decide a credit card isn’t right for your child and want to close it, the issuer will need permission from both of you before canceling the account.
Bad credit: If your child has a bad credit record already, then their only option for a credit card is a secured one, which requires an upfront deposit to secure the credit line. Typically between $250 and $3,000, the security deposit is generally equal to the credit line, but there are a few cards that only require a nominal deposit for a higher credit line. You can also make additional deposits to increase the credit line, if needed. The deposit is often placed in a money-market account and is returned if the card is closed in good standing and with no unpaid balance. Otherwise, a secured card works just like a regular credit card and can help your child improve their credit score if used responsibly.
Card features to consider
When choosing among student credit cards for your child, there are several features that you should be aware of.
APR: Keep in mind that student credit cards typically have APRs that are higher than the average—19.8% versus 15%, respectively—largely because new borrowers are riskier. Make sure your child knows that they can avoid those expensive charges by paying off the entire balance every month.
Rewards: Some student credit cards come with rewards programs, either cash back or travel. If your child must travel far to visit home, consider a travel rewards card to offset those costs. But if your student lives off-campus and buys their own groceries, a cashback card may be a better choice.
Late fee forgiveness: Some student credit cards will forgive the first late payment and not charge a fee. This is a nice feature if you worry that your student may have a few early hiccups managing a card.
Credit score: Managing a credit card can help build a good credit history. One way your student can see how they’re doing is to monitor their own credit score. Some student credit cards make this easy by offering free FICO scores on monthly billing statements.
Who pays, and how: It’s likely that you still support your child financially—even if they have a part-time job in college—so it’s important to figure out who pays for the charges and where that money comes from. Is it automatically deducted from your account? Or, does the card draw from your child’s own bank account, after you’ve deposited money in it? The solution depends on your own family circumstances, but it should be clear to you and your child before going forward.
Money management: Help your child succeed with a credit card by explaining best practices. Encourage them to always pay off the entire balance every month, and avoid purchases that would make it hard to do so. Consistently adding to a card balance that can be paid off can quickly snowball into a more serious debt situation.
Also, make sure they review their charges, at least every month, if not more. This can help them understand where they spend their money and how they can adjust their budget, if needed. It’s also a good security practice to quickly spot unauthorized charges.
Credit building: “The benefits of building a credit score at a young age are insurmountably more valuable than the potential pitfalls,” Butera says. Still, remind your student to make on-time payments a week or so before the due date. Tell them to aim to spend no more than 25% of the available credit to boost their credit score.
Training wheels: If your child already has trouble with money management—such as overdrawing on bank accounts, overspending on their college meal plans or constantly requesting money—maybe it’s too soon for a credit card of their own. Instead, consider adding them as an authorized user. They will get their own card, but are not responsible for making payments. You can also remove them as an authorized user at any time without needing permission. American Express also allows you to set spending limits for authorized users, giving you greater control if you need it.