If you're like a lot of parents, the first thing you thought when you saw the title of this book was, "Are you crazy? Why would a kid need a credit card?" But whether you believe it or not, there are a lot more reasons than the shopping mall.
Credit cards are useful for kids who travel with school or a youth group, even if it's just around town. They won't rent cars, but they will eat, and almost every fast food chain now accepts them. Your child can also keep it on hand just in case something goes wrong. There are lots of other good reasons for minors to have credit cards, like teaching them how to handle money.
Giving a credit card to a minor is a choice that can only be made by parents or guardians. If you've been thinking about this, here are some things to think about.
First, you should know that minors can't have "their own" credit cards. A credit card is given out based on a contract, and minors can't sign contracts that are legally binding because they are too young. So, a minor's credit card has to be linked to the account of a parent or guardian.
Cardholder number two
It's easy to add a minor as a secondary cardholder. There's no need to fill out an application or check your credit history. What matters is the creditworthiness of the main account holder. A second card might have a different account number, which makes it easier to keep track of spending or cancel the card if it gets lost or stolen.
On the other hand, the person who is the primary account holder is responsible for all payments. If there are problems with the account, the credit history of the main account holder is affected.
Debit cards
These look and feel just like credit cards, but there's a big difference: you don't have to pay anything back. Debit cards are linked to bank accounts, so as soon as a purchase is made, the money is taken out of the account. The problem with being linked to a parent's checking account becomes clear right away when a minor can't control how it's used and the parent finds their account empty. So, do yourself a favour and look for a bank that has accounts for young people. So, your child won't be able to use the debit card unless he or she has money in the account. Youth debit cards are a great way to teach kids that they have to earn money before they can spend it, as long as they keep track of how much they spend.
Credit cards
The difference between a charge card and a credit card is that the balance on a charge card must be paid off in full at the end of each billing cycle. Interest does not build up on a charge card. In this case, the minor is again considered a secondary card holder. Since you can't keep a balance on a charge card, it's a good way to show how important it is to watch how much you spend.
Pay-ahead cards
You put money on these cards, which you can then use to buy things anywhere that accepts the other major credit cards. As long as there is money on them, they can also be used at ATMs to get cash. When the money runs out, all the parent or child has to do is reload the card.
Locked-down cards
This also looks and feels like a credit card, but it's more like a debit card because the user can only buy things as long as the card has money on it. This kind of card is paid for by putting money into the account of the company that gives it out. Minors who want to start building credit often use secured cards. From the point of view of a parent, this is a good alternative to co-signing.
To co-sign or not to co-sign
Most parents do everything they can to help their kids do well in life. That's great, but they should really think twice before co-signing for a credit card. Young adults can apply for credit when they are 18 years old. But if they haven't built up enough credit, they won't be accepted without a co-signer.
And the co-signer takes on the obligation to make payments. If your grown-up child doesn't work, you'll have to pay the bills. If you don't, it will hurt your credit. Worse, if your adult child hasn't learned how to handle money well, you might have to pay off those credit cards you co-signed for a long time.
