Giving a teenager a credit card might sound like a terrible idea. Many teens have little to no work experience, don’t know how to manage money or knowledge of credit scores, and don’t understand the consequences of charging more to a credit card than they can afford to repay before the bill is due.
But the teen years can be an ideal time to help your children establish credit. While they live with you, you’ll have an easier time closely monitoring what they’re buying, the total amount they’re spending each month, and whether they’re paying their balance in full and on time each month — in other words, whether they’re using credit responsibly to build their credit score.
The importance of credit history
“Establishing a credit card for your teenager today will help their score immensely by the time they are older,” said Matt Hylland of Hylland Capital Management, in an interview. “Because credit history is such a big factor in your credit score, and there is no way to compensate for no credit history, the earlier they can get an account created, the better.”
The length of your credit history accounts for 15 percent of your credit score according to FICO, the provider of the credit scores that 90 percent of lenders use.1 FICO offers a free credit scores estimator via its website, which allows users to get their range via a 10-question survey.
“If you are worried about your teenager's responsibility with a credit card, consider a card that has a low limit, or simply keep custody of the card yourself. The important part is to get the account opened early so credit history can be established,” Hylland said. (Related: Building your financial pyramid)
Your child probably has no credit history, which can make it difficult to get approved for a loan or credit card. However, there are several ways for your teen to start building credit.
Adding your child as an authorized user
If you have an excellent credit history, adding your child to your credit card account as an authorized user can help him or her establish their own positive credit history. This strategy will only work if your credit card company reports authorized users to the credit bureaus, so ask before you request the card.
An authorized user account may not help your child as much as having an account in his or her own name because credit scoring formulas give more weight to accounts that users are financially responsible for, but it will be better than having no credit history and may be the only option if your teen can’t qualify for their own card.
Under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, also called the Credit CARD Act, credit cards and other types of open-ended consumer credit cannot be established by consumers younger than 21 years old unless they have a cosigner who is 21 or older or the applicant has indicated that they are independently able to repay the amounts they borrow.2 This regulation makes it somewhat more difficult for teenagers to get a credit card in their own name in that they’ll need to be employed or get a parent to cosign in order to get approved for their own credit card.
The drawback of adding your child as an authorized user is that you put yourself at risk if your teen racks up excessive charges that you can’t afford to repay or don’t want to be responsible for. He or she will not be legally responsible for the charges, but you will.
Cosigning on a card for your teenager is certainly an option, but you put yourself at risk of having your own credit score damaged if they don’t make at least the minimum payment on time each month. You’re also responsible for their charges if they don’t pay off their balance. That being said, cosigning on a card with a credit limit of just a few hundred dollars might be less risky than adding your teen as an authorized user to your account if you have a substantial credit line.
If you do add your child as an authorized user, it’s a good idea to do so on a card where you don’t typically use too much of your credit line. The amount of debt you have relative to the amount of credit available to you accounts for 30 percent of your credit score.3 You don’t want your teen’s credit use to hurt your score or theirs.
If the authorized user or cosigner routes aren’t right for your situation, and if your teen has a steady job, a secured credit card is a good way to start building credit.
Secured credit cards
Secured credit cards allow people with bad credit or no credit to get a credit card by depositing an amount equal to their credit limit with the card issuer. If your teen doesn’t pay his or her credit card bill, the credit card company can use the deposit to pay the charges. The deposit limits the card issuer’s risk and makes it possible to extend credit to someone who hasn’t demonstrated creditworthiness.
NerdWallet, a consumer financial education website, recommends the Capital One Secured MasterCard for consumers who want to make a low deposit of $49, $99, or $200 to get a credit line of $200 to $3,000 based on creditworthiness. This card has no annual fee, and your teen must have a bank account to get approved.
If your teenager applies for a secured card, make sure the issuer will report his or her payment history to the credit bureaus. If not, the card won’t help establish credit. The CapitalOne card does report to the three major credit bureaus: Equifax, Experian, and TransUnion.
Smart credit usage
Helping your teenager establish good credit isn’t just about helping him or her get access to credit — it’s also about educating them about how to use their credit responsibly and monitoring them to make sure they’re making good decisions about their credit use. Teach your child how credit scoring works as well as how credit card interest and late fees work so they understand how to earn and keep a high credit score and stay out of high-interest debt.
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1 myFICO, “Understanding FICO Scores: What you need to know about the most widely used credit scores.”
2 Public Law 111-24, 111th Congress, 123 Stat. 1734, Credit Card Responsibility and Disclosure Act of 2009, May 22, 2009.
3 myFICO, “Understanding FICO Scores: What you need to know about the most widely used credit scores,” p. 14.