When it comes to getting a credit card, there is no “perfect” time that works for every child. However, here are some steps that you can take to prepare for when that day arrives.
1. Set up the basics first: Your child should have her own checking and savings account to get used to balancing a checkbook and paying with a debit card before getting her first credit card. Once she gains responsibility and independence managing the inflows and outflows (without overdrafts), it is time to introduce the important features and benefits of building credit.
2. Discuss the importance of credit: Why is building credit important? Explain that building a good credit score can help your child borrow money when she needs it, whether it is a mortgage for a home or loan for a car. Credit cards can also help protect against fraud and offer rewards.
3. Remember to talk about the risks, too: After understanding the benefits of credit, it is important to recognize the risks. Explain why acting responsibly and making on-time payments are crucial. If your child does not pay on time and in full, she may be charged late fees and interest on the remaining balance at high rates. In addition, her credit score will decrease. A bad credit score can prevent the bank from lending her money, or she may be charged a higher-than-average interest rate.
Once your child has shown that she understands the benefits and risks associated with a credit card, she will be ready to apply for her first one. Work together to evaluate the different options, including annual fees and rewards. It is important to read the fine print about cashback offers and how points are accumulated and where they can be used. High school can be a good time for your child to get a credit card because you will be there to guide her, she will have a low credit limit, and she will be ready once it is time to go away to college. This may be too early from some children, but even if you wait a few years, it is wise for your child to establish a good credit score before graduating from college so that she will be ready when it is time to apply for a job or lease an apartment. It will also develop financial responsibility and independence.
There are many benefits to building credit and learning good personal finance habits early on, but do not rush steps one through three, because the burden of high-interest debt at a young age will outweigh the benefits. If you have questions, contact your relationship manager or email CW&W@bbh.com for more details on our Next Gen Program focused on preparing the next generation for financial independence.
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