Should you give your children access to your credit card?
Handing over your credit card to your teen may not sound like a good idea.
But it could actually be a smart financial decision. Not only can it help kids learn money management skills, it can help their credit score as well.
Adding a child as an authorized user on a parent’s credit card can give the child a boost when it comes to building a strong credit profile. That is, as long as the parents have a good credit rating.
“Only do this if the parents have good to excellent credit in the first place,” said Lynnette Khalfani-Cox, author of Perfect credit. “There’s no point in hurting someone with bad credit. ”
Related: Teaching Kids About Financial Responsibility
Good credit habits such as paying on time, not taking on too much debt and having a long credit history, are likely to have a positive impact on an authorized user’s credit rating, according to FICO, the leading provider of credit scores.
“The precise impact of the authorized user’s information on the score will vary, depending on both the information contained in the authorized user’s account, as well as the makeup of the consumer’s credit file as a whole,” said Ethan Dornhelm, vice president of scores and analytics at FICO.
A good credit score can bring many benefits to a child once they enter the real world. This can potentially help them get the best interest rates on loans, qualify for an apartment, get better insurance rates, and open their own cell phone plan.
But parents should be warned: they assume all risk when adding an authorized user. The child will have the same purchasing power as the account holder, but no payment obligation.
“The child will not assume any legal responsibility for paying these balances, it is all up to the parent,” said Matt Schulz, senior industry analyst at CreditCards.com.
This is why experts stressed the importance of immediately establishing ground rules and expectations with children. if we give them purchasing power.
“Have a very direct and very honest conversation before handing over the card, so everyone knows what the expectations are and what responsibilities are involved,” Shultz advised.
Related: Why You Could Have Hundreds of Credit Ratings
Parents need to be very specific about when, how much and under what circumstances a card can be used and who will foot the bill for the child’s expenses, Khalfani-Cox added.
Some parents hold the child responsible for their expenses while others set a monthly spending limit.
Keep in mind that parents do not have to hand over the card at all. While credit card companies will send the authorized user a separate card in their name, some parents may choose not to give it to their child.
Khalfani-Cox added her 19-year-old daughter as an authorized user on one of her major credit card accounts last year, but when the card arrived in the mail she tucked it away in a drawer.
The movement worked. Her daughter, who is still in college, has a credit score in the 700s.
“I was able to give her a good start in the credit world and teach her the prudent use of credit in a way that prepares her for something bigger.”
She plans to eventually add her teenage son as an authorized user.
Credit cards vary in terms of their authorized user eligibility requirements. Some cards require an authorized user to be at least 15 years old, while others have no age limit.
When it comes to credit history, the date the parent opened the card will be reflected in the child’s score, Dornhelm explained.
Related: The 800+ Club: Secrets of People With High Credit Ratings
In addition to the spending rules, parents should also talk to their children about the proper use of credit and its long-term impact.
Parents who don’t want to take the risk of adding a child as an authorized user can choose to open a secured credit card in their child’s name. Secure cards tend to require a deposit which then becomes the spending limit of the card.
These cards can help create credit, but there is less risk of overspending.
“This person is building their own credit history instead of building on someone else’s,” Schulz said. “Mom or Dad can deposit $ 200 or $ 250 to set the credit limit and that would basically be all the risk they would have. It’s a way to help your child build their own credit history without making it over. risky than it needs to be. ”
CNNMoney (New York) First published March 27, 2017: 10:50 a.m. ET