Why Setting up Young Kids With Credit Cards Might Not Be a Bad Idea

April 1st 2017

Mike Rothschild

With the average American household carrying $16,000 in credit card debt, it would seem to be a no-brainer that credit cards should be kept away from kids at all costs. 

However, there are legitimate reasons to give teens credit, either through adding them on to parents' cards or signing them up for their own. This can help build financial literacy and start teens off toward their own good credit scores. 

Making payments on time, not carrying too much debt, and having a long credit history can have tremendous benefits on your credit score. These have tangible effects, such as helping qualify for an apartment rental, lower interest rates on home and car loans, and better rewards on future credit cards. And the earlier you start, the easier it is to build a higher score.

"Building credit is difficult, but it’s a whole lot easier for young people who have been added to a parent’s credit card account as an authorized user," writes MarketWatch credit card expert Virginia C. McGuire. 

The most common way for parents to help their kids build good credit is to add them as authorized users on their cards. This also allows the child to ride on their parents' good credit, helping start their own history.  

However, there are a few things parents will need to do before introducing their kids to the world of credit.

A parent who has bad credit doesn't help their child build good credit, so parents first need to make sure their own score is solid.

"Only do it if parents have good to excellent credit in the first place," Lynnette Khalfani-Cox, author of "Perfect Credit," told CNN Money. "There is no point in piggy-backing off someone with bad credit."

The Consumer Financial Protection Bureau also recommends ordering your child's credit scores from the three major credit bureaus, to make sure there are no mistakes in their personal information, and to catch any signs of identity theft.

If those things have been done, it's generally recommended to add children as an authorized user to a parent's card first. This often has no age limit, and involves no risk for the teenager. Even so, parents should set strict rules for what the card can be used for. 

"Have a very upfront and very honest conversation before you hand over the card, so everyone knows what the expectations are and what the responsibilities involved are," advised Matt Shultz, who also spoke to CNN Money. While the lack of responsibility for kids to pay off debt on cards they're authorized to use is attractive, it can also be risky. 

College students with their own credit cards up do have to pay back their balances, and credit card debt among college students was so bad that in 2009, the Obama administration signed the Credit CARD Act, which restricted opening a card to only those over 21 years old, unless they had a parent as co-signer.

Even with the new rules, data from Sallie Mae showed that 16 percent of college students were carrying at least four figures of credit card in 2015, and that average debt of students between the age of 21-22 was slightly more than $1,000. And if parents co-sign a card, they're as legally responsible for paying the debt off as the student is.

For those reasons, not everyone agrees that giving young people access to credit is a good idea. 

Influential financial guru Dave Ramsey writes on his site that "getting a credit card for your teenager is an excellent way to teach him or her to be financially irresponsible." Even industry site advises parents to be wary of giving credit to teenagers who spend freely, don't understand credit terminology, or are constantly asking for money.

But for the right teenager, adding them as an authorized user can have long-term beneficial effects. "Perfect Credit" author Khalfani-Cox told CNN Money that she added her 19-year-old daughter as an authorized user on one of her main credit card accounts last year, but kept her from actually using it. Her daughter wound up with a credit score in the high 700s.

"I was able to give her a great start in the credit world," she told the site, "and teach her about the prudent use of credit in a way that set her up for something larger."