By the time your son or daughter goes off to college, he or she may not have had much experience with a credit card, perhaps only as an authorized user of your card for emergency situations. One reason is the Credit Card Act of 2009 limited credit card companies' marketing to young adults under the age of 21. Under the recent law, anyone under the age of 21 must show proof of income or have their parents co-sign for a credit card.
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The average age at which young adults today are getting credit cards in their own name is 22, according to Matt Schulz, senior industry analyst at Creditcards.com. (Schulz cited an independent study conducted by Princeton Survey Research Associates International.)
But most parents I spoke to want their kids to have a credit card earlier than 21 for two reasons: access to funds in an emergency situation (especially when they start driving) and to teach their kids how to handle the responsibility of credit and establish a good credit score.
Up until the age 18, most banks will allow parents to issue a debit card to their child as an authorized user. In this case, a parent will put a certain amount of money into an account each month and allow the child to make purchases via the debit card. One nice feature of this is parents can instantaneously track where the card is being used, as purchases will automatically show up online. But after age 18, when most kids are either working or in college, and may not be eligible for a debit card attached to their parent's account, they will have to apply for credit.
The best one to start out with is a prepaid or secured card, according to Schulz. With a secured card, parents can deposit a certain amount into an account, say $250. That would give your child a $250 credit limit. Your son or daughter can begin to make monthly payments on time, thereby learning how to control spending while establishing their own credit score.
"Ideally, kids can use the card to supplement cash and pay off the whole thing at the end of each month," according to Andrew J. Rosman, dean of the business school at Fairleigh Dickinson University in Teaneck, New Jersey.
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He emphasizes the importance of teaching kids about compounding interest and debt at a young age so they can become "financially literate" adults.
For example, with a savings account, your child can learn how saving $10 per week will earn money in the form of interest that is reinvested over time. As they get older they can better understand how that same concept works in reverse, according to Rosman.
"When you carry a balance on a credit card and only make the minimum payment, (because of compounding interest being charged to you on the balance) you can really get yourself into a hole that could take many years to get out of," he says.
Your child's credit score will become especially important as he or she graduates college and moves out on their own. They may need credit to set up an apartment or to get a car loan. Also, establishing good credit in their early 20s will allow them to upgrade to a better card with a lower interest rate and more attractive rewards later on.
Of course, not all parents are well-equipped to teach financial literacy, Rosman says.
And Millennials seem a bit more credit card-averse, says Schulz. He said that's because the 18 to 29-year-olds were growing up during the recession and a more difficult job market. Without jobs, they're not seeking out credit cards as much as the prior generation.
The kids who are the most financially responsible are the ones who have jobs, even while they're still in school, says Rosman. Having to pay their own bills seems to teach a stronger lesson, he adds.