Part IV: Understanding Credit & Credit Cards for Young Adults

Monday, October 22, 2012 at 10:28pm by Site Administrator

This is Part IV of a larger educational resource, Money Management: A Guide to Teaching Finances to Children.

When the Obama administration’s Credit Card Accountability, Responsibility, and Disclosure Act took effect in 2010, the days of college freshmen blindly accepting credit cards during orientation week were over. Under the Act, any cardholder under age 21 must prove an independent source of income in order to receive credit.

While parents may have breathed a sigh of relief as worries about ruined credit scores vanished, building credit is still important, and using a credit card responsibly can be a valuable experience for any young adult. Much of today’s technology requires a credit card on file, whether for smartphone apps, use of an electronic e-reader or otherwise, and this can be a golden opportunity to teach your child about credit.

To properly educate your child about the use of credit, ensure that he or she has a solid understanding of the credit system, and particularly the ramifications of bad credit. A grasp of the credit scoring system and awareness of the effect on loan interest rates, insurance and the ability to secure a mortgage are essential. If you are confident that your child takes credit seriously, you need not wait until they are 21 to introduce credit card usage.

Some families choose a pre-paid credit card. Parents load the card with funds and set a limit on how much a child may spend. Prudent parents can hold their child responsible for monthly payments and any penalties that result from overspending. Some families coach their children through the bill-paying process and some have students pay parents directly.

Once your offspring has proven the ability to handle a monthly payment and stick to a budget, you may choose to co-sign a card with your child. The proper handling of an account like this will build a child’s credit rating because it is in his or her name, but it is important to remember that any credit-related misdeeds will negatively impact your credit score as well. If used wisely, a co-owned account can set your progeny up for a good credit card and competitive interest rate when it is time to hold a card independently.

Craig Evans Carnick, a financial planner who leads workshops on financial knowledge for his clients’ children, advocates a
hybrid approach
:

  • Make the child an authorized user on an existing credit card
  • Designate that the card be used only for emergencies
  • Have the child make a personal budget
  • Open a checking account that parents can access
  • Develop contingency plans for overspending, such as an agreement on loan terms

Continue to Part V: Trusted Financial Resources for Parents, Teachers and Young People, or return to the Table of Contents. 

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