As a parent, you want the best for your children and will do whatever you can to get them prepared for their financial future. If you’re thinking about adding your child as an authorized user to your credit card account, your intentions may be good, but are you really making the right decision?
Ideally, you want to foster good spending habits and stress the importance of having good credit. An irresponsible teen with a credit card will result in a big headache and potential damage to your own credit. If you’re on the fence about giving your teen a credit card, see if the benefits outweigh the potential risks.
Benefit No. 1: A credit card could help build your teen’s credit score.
Your child’s GPA matters in school, but once they’re out in the real world, their credit score will be taken into account when they do things like apply for a car loan or mortgage. There is no better way to build credit than by opening up a credit card — the sooner the better, as the length of your credit history usually helps increase your credit score. Hence, signing your teens up early can be a big advantage for them.
Risk: Remember that credit card issuers cannot approve credit cards for people under the age of 21 in the U.S. — it’s the law. So, minors can only get a credit card by piggybacking on their guardian’s account as an authorized user.
Even if you (the parent) are a responsible card user, you will make yourself vulnerable by putting so much power in the hands of a minor. If your teen (the authorized user) makes a late payment, or if any other problems arise, your credit score will be negatively affected. If you’re looking to get a loan in the near future, the benefits of raising your child’s credit score might not outweigh the risk to your own credit score.
Benefit No. 2: Your teens purchases will be protected.
It’s common for parents to give their children cash to carry around just in case of an emergency, but cash is more susceptible to theft or loss. Credit cards are better protected against unauthorized charges than any other form of payment — the user has zero liability in these types of situations. Therefore, it can give you peace of mind to give your child a credit card.
Risk: Although it’s easy for teens to grasp the concept of losing money when they misplace it, they may not fully understand the concept of losing money through fees and interest payments, which is the true cost of using a credit card.
Benefit No. 3: You know what your teen is buying.
Credit cards can be used as a tool to monitor where your child is spending money. This can give you insight into your teen’s life that you may not otherwise have.
Risk: By giving your teen a credit card, you’re basically giving him or her access shop online, which is risky. Although you can monitor purchases, there’s a chance you won’t find out what they buy until it’s too late.
Don’t forget that no matter what kind of purchase your child decides to make, as a parent, you will be fully liable for all charges at the end of the month. If your son or daughter tries to hide purchases from you and the payment is missed, your credit score will suffer.
Benefit No. 4: Your teen will learn budgeting skills.
Credit cards can be a great way to teach your kids money management skills and financial responsibility. Ideally, they will learn to manage spending and never miss a single payment.
Risk: In reality, with so many adults struggling with credit card debt, it shouldn’t be surprising if your teen does, too. Their spending will ultimately impact your finances. The whole point was to teach your son or daughter how to be financially responsible, but are you willing to sacrifice your credit to teach a lesson?
If you don’t feel comfortable opening up a credit card for your child just yet, you may want to consider going with a different option such as a debit card, prepaid card or secured card, depending on your concerns. These options differ from a credit card:
— Debit card: Linked to a checking account (possibly a joint checking account)
— Prepaid card: Prepaid financial account with a debit card
— Secured credit card: Credit card that requires a deposit as collateral
Each of the three card types offer various levels of protection and freedom for both you and your child. But if you’re confident your child can use credit responsibly, a credit card might be the way to go.
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4 Risks to Consider Before Giving a Credit Card to Your Teen originally appeared on usnews.com
