Today, Mellody Hobson talks about kids and credit cards.
I need you to hear me out on this: I think that parents should open credit cards for their kids when they are just sixteen years old.
Credit cards are a weapon of mass destruction if they aren’t used correctly. Sixteen coincides with other big responsibilities like driving. You wouldn’t just hand over a set of car keys to your child before teaching them how to drive. Driver’s ed is required by law. But what about financial education? We can’t send our kids off to college, put a powerful piece of plastic in their palms and expect them not to crash and burn!
I’m not talking about need; I’m talking about training. I think part of the reason we’ve gotten into so much trouble with credit cards is that no one taught us. Just like a 15-year-old has a learner’s permit before handling two tons of metal, sixteen is a great age to get a credit learner’s permit. That way, you have two years to teach your kids how to sensibly use a credit card before they leave the house. You can monitor their activity, sit down with them, review the bill, explain the trap of high interest rates and penalties for late payments—all before they’re 18, when they leave the house and start to think of themselves as independent adults. By then, parents have much less influence—not to mention control.
Now, I have some guidelines. First, we are talking about ONE credit card. I don’t think anyone should have more than one credit card, much less a teenager. A recent survey found that half of college students own four or more credit cards. That’s crazy! NO ONE needs that many credit cards. Next, the card needs to be paid off entirely. Every. Month. I cannot stress this enough. It’s not okay to just pay off the minimum balance.
One option is to make your child an authorized user on your card. This allows you to closely monitor what they’re spending and where, and it makes the parent ultimately responsible for all charges. The upside is that your child’s usage of the card is reported to the credit bureaus, which can start building a positive credit score.
Yet another option to open a “secured card” so your child learns to stay within a budget and be responsible, making timely monthly payments. With a secured card, the cardholder can only charge as much as the sum of money that’s deposited in advance. So, for example, if your child deposits $200, it remains security for the bank, and they can charge up to $200. Paying reliably means building a good credit history — a necessity for the future.
Is it hard for a teenager to get a credit card without a credit history?
Well, yes and no. In the past, every college welcome week was decorated with booths from banks offering cards to students with no income and all they required in exchange was a signature and an address. Plus, the student walked away with a free frisbee. Now, new federal rules keep banks off college campuses and prevent them from giving credit cards to students without jobs or assets.
But it’s a new world, and kids get their hands on them anyway. Get this: Now banks find college students through their Facebook profiles and entice students through games and prizes. Listen, this is NOT a “live and learn” life lesson for your kids. In a recent survey, found that only 63% of students said their parents helped them learn about managing their money, whereas 82% said their parents taught them to drive. It’s time to up parents’ influence on financial education before any damage is done.