Credit Card for Children: A Powerful Financial Literacy Tool

Using credit card for children as a financial tool can be a powerful ally in our financial literacy journey for kids. Credit, in general, and credit cards, in particular, are powerful financial tools available to us. This is evident from Americans having over $1.03 trillion in credit card balances in Q2, 2023. Another astonishing statistic: about 65% of credit card users carry a balance for some period of time. About 46% of those having credit card debt will take at least a year to pay it off. Take these numbers, add the incredibly high interest rates, and you’ll see how much money we’re forking over to financial institutions to keep these cards. This is not just an American phenomenon. In Canada, for example, the average credit card balance has risen from $3,825 in Q2-2022 to $4,183 in Q2-2023.

Keeping light of these numbers, we must teach our children the effective and efficient use of credit cards. These can be used to teach children about revolving debt, responsible spending behaviour, interest rates and credit scores. These are critical lessons for their financial prosperity.

Reasons for Getting Your Child a Credit Card

Credit cards, by the very nature of our economic system, are fundamental tenets of our financial life. Credit cards can offer children multiple valuable lessons as they transition into adulthood.

Build Credit Score

The length of your credit history carries a 15% weightage toward your credit score. Payment history of debt like credit card accounts for 35% of your score. Having a credit card early and ensuring it is paid on time helps build a good credit score. Explain the importance of having a good credit score. Use real-life examples to show how having a good credit score can impact their financial prosperity in more ways than one. After all, a good credit score can help them get debt and loans at cheaper rates, lower their insurance premiums and even help them have more housing options.

Powerful Financial Literacy Lessons

Credit cards for children provide us with a potent tool to impart critical financial literacy lessons to our kids.

Credit doesn’t mean extra income.

Concept of minimum repayments and interest

While each credit card statement has a minimum repayment amount, encourage your child to pay off the balance monthly. Explain to them that failing to do so will have them pay interest. Not paying their entire monthly balance will cost more in interest over time. This will mean they will have a shrinkingly low balance to spend on their needs, wants and savings goals. Use this fantastic tool to show them various payment scenarios and how their payments can cost them more in the long term.

Furthermore, if they are exceeding their expenses regularly, it is a sign that they need to learn budgeting. They are spending more than their affordability, and it is something that they need to improve upon. Use our budgeting tool for children and teens to have them track their expenses and allowance/ earnings. Gain insights into their spending patterns to identify improvement areas.

Build Healthy Financial Habits

Credit cards can help children build healthy financial habits as they grow into adulthood. This is a critical skill as they navigate their financial prosperity journey. As they use credit cards, they learn the importance of repaying the entire balance, compound interest, credit scores, and controlling their spending. As you hand over your child a credit card, set some guidelines on its usage, such as expenses you will cover v/s expenses that will have to be borne by them. Set a regular cadence to discuss their credit card statement every month.

Safety and Convenience

Credit card for children are usually more safe and convenient than having them carry cash. Most credit cards have security features that can help users block card if lost. Credit cards also provide mobile and web apps that make tracking expenses more manageable. It also provides a convenient payment method when they need to make purchases, either in stores or online.

When to Give A Credit Card to Your Child

Expert tip

Generally, teenagers around 16 to 18 years old are considered an appropriate age, as they are more likely to grasp the responsibilities associated with credit card ownership.

The ideal age for getting a credit card for children can vary depending on the child’s maturity and understanding of financial concepts. However, experts say that teenagers around 16 to 18 can have a holistic understanding of concepts associated with credit card ownership. Depending on where you live, legislation may also govern the age at which an individual can have a credit card.

There are different types of credit cards, such as supplementary add-on cards, secured credit cards, or credit card. Read more about these products for children in our exhaustive guide on debit and credit cards for parents. Depending on your and your child’s specific circumstances, determine what product suits them.

How to Pick the Correct Credit Card for Children

If you have determined that your child is ready for a credit card, the next step is identifying which one to pick. While identifying a credit card for your child, include them in the analysis and discussion. Not only will this help with them get the most appropriate financial product, but it will also serve as a potent enabler for their financial education. As you go about picking the appropriate card for your child, include them in the three-step process:

While researching, have your child evaluate multiple factors to determine their most appropriate credit card. Depending on your goals for introducing credit cards to your child, determine the correct card. For example, a secured credit card may be a great way to introduce credit cards to children if you are looking to build credit score. Some of the factors that you can look at while choosing a credit card include:

• Fees – Evaluate annual fees, late payment fees, and balance transfer fees to identify the lowest-cost card appropriate for your child.
• Interest rates – Opt for a credit card that has a lower annual percentage rate to reduce the financial burden on your child in case they miss a payment
• Rewards Program – Have your child evaluate different rewards categories, such as cashback, gas, travel, etc., to determine their best credit card.
• Insurance, security and privacy features – Comprehensive insurance provides peace of mind for theft or fraud. Ensure privacy policies match your data-sharing comfort, and robust security safeguards your child’s financial info.
• Credit bureau reporting – If you want your child to build their credit score, ensure that the credit card reports to all three credit bureau reporting agencies.

How to Explain Credit Cards to Children

Explaining credit cards to children doesn’t have to be a daunting task. With a touch of simplicity and a dash of personal anecdotes, you can make the concept accessible and help your kids develop a healthy relationship with money from an early age.

Credit Cards 101

Explain a credit card as a handy loan from a financial institution that lets you buy things without using cash. You can use it whenever you want, but the key is for them to understand that it is a loan. This borrowed money must be repaid, just like a loan from a friend or family member. Some basic terms for your teenager to understand include:

• Monthly Balance – What you Owe: First, let’s discuss the monthly balance. It’s like a tally of all the purchases made using the credit card during a billing cycle. Everything you buy with the card adds up, and that total is what you owe the credit card company at the end of the month.
• Interest Rates (APR) – The Cost of Borrowing: Interest rates, or Annual Percentage Rates (APR), are crucial to credit card terms. Think of the APR as the cost of borrowing money. When you don’t pay the entire balance by the due date, the credit card company charges you interest. It’s like a fee for borrowing their money.
• Minimum Repayment: Credit cards come with a minimum repayment requirement. This is the smallest amount you must pay monthly to keep your account in good standing. However, paying only the minimum can lead to a cycle of debt, with high interest charges piling up over time.
• Fees – Extra Costs: Credit cards might come with other fees apart from interest. Typical fees include annual, late payment, and cash advance fees. Ensure your teenager understands that using the card wisely and paying on time can help avoid these extra costs.

Teaching Responsibility

Understanding credit cards is not just about avoiding pitfalls but also about cultivating financial responsibility. Here’s how you can approach it with your teenager:

• Setting Limits: Emphasize the importance of staying within the spending limit (credit limit) to avoid overspending and accumulating debt.
• Paying on Time: Encourage them to pay the total balance by the due date to avoid costly interest charges.
• Budgeting: Help your teenager create a simple budget to manage their spending. This can be a valuable tool for financial responsibility.
• Open Communication: Keep the lines of communication open. Let your teenager know they can ask questions and seek guidance about credit cards and financial matters.

Conclusion

Introducing credit cards to children can be a strategic move in our journey to enhance their financial literacy. It allows us to teach them about vital concepts like revolving debt, responsible spending behaviour, interest rates, and credit scores. These are lessons that can significantly impact their financial well-being in the future.