Your kids will probably be caught off guard the first time someone inquires about their credit history. For my kids, it was that first apartment rental in college. So building a solid credit score early can be a smart move. It’s also an important part of your child’s financial education.
Prepaid debit cards are excellent financial training wheels for kids and teens. They’re safe and accessible. But they don’t build a credit history.
Credit cards build a credit history. But safe and accessible for teens? Not so much.
Teens can do a lot of serious financial damage with a credit card in a very short period of time. Like when a kid racked up $7,625.88 on his parent’s credit card playing Xbox games.
Legally, a teen can’t get a credit card as an independent cardholder until age 18. But even then, most teens won’t qualify. They have to be able to demonstrate a sufficient steady source of income outside of Mom or Dad. Most can’t meet that bar.
You could add your teen as an authorized user on your own credit card, or you could co-sign for your teen on a separate card. But both routes put your own credit history (and budget) at risk.
Consider a secured credit card instead.
A secured card requires an up-front deposit. That security deposit dictates the credit limit on the card. Often they’re the same amount. If your kid falls behind, the card issuer can dip into the deposit to cover delinquent payments or late fees. When the card is closed or upgraded to a regular credit card, the security deposit (less any delinquent obligations) will be returned. The rules on this will vary and are spelled out in the cardholder agreement, like this one from Discover.
But before applying for the secured card, consider imposing two prerequisites for your teen:
- A sustained responsible track record with a debit card. If your teen can’t pass the No-Decline Challenge, he isn’t ready.
- The security deposit in hand. Make your teen come up with the security deposit, not you. If your teen can’t save the few hundred dollars required, she isn’t ready.
With the prerequisites met, you can check out sites like Magnify Money to compare secured credit card offerings. At the moment, the top pick is the Discover it Secured Credit Card.
I culled through the user reviews of the Discover card and found a few things to look out for:
- Applying might be a hassle. “Applying for the card is like enlisting in the military, all the documentation required is ridiculous.”
- Slow payment posting can cause unexpected declines. “The fact that it takes 10 days to adjust your available balance after the payment is taken out of my checking account, is a killer for me.” That means your teen could be bumping up against the card limit and getting purchases declined well after a balance payment is made.
- Stinginess with limit increases. “I figured my limit would be increased as I use it and time passes but nothing has changed.”
- Lengthy graduation period. “I have to wait a whole year to be converted to an unsecured card.”
To circumvent any issues with card limits and ensure your teen can pay the card off in full every month with low utilization, I recommend a hybrid strategy:
- Use the secured card in conjunction with a prepaid card.
- Put a few predictable or fixed recurring billings on the secured credit card that fall well below its limit and can be comfortably paid off each month.
- Leave the remaining discretionary spending on the prepaid card to stay on budget and avoid any risk of debt.
On budget. No debt. A solid credit score. Your teen is set.
And your teen’s eventual landlord won’t be coming after you as the cosigner for the rent either. Bonus.
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