Jumpstart is a national coalition to teach financial literacy to children; according to a 2006 study they conducted, nearly 52% of high school students use credit cards. Let's make sure they use them wisely.
Since the Credit Card Act of 2009 forbids the issuance of a credit card to anyone under the age of 21 without proof of income or a co-signer, here are four strategies parents can use before unleashing their kids with plastic:
Co-sign A Credit Card
This will indeed help your child establish credit. Due to a change in the FICO calculation in 2008, piggybacking will no longer allow authorized users to share in a good credit score; authorized users will be reported to the bureaus, but will no longer be able to take advantage of the primary holder's score.
Since your name is on the account when you co-sign a credit card, you will have to take an active role in managing the card and teaching your kid to use the card wisely. The good news is that both parties can build good credit on a co-signed account, and the bad news is they can bring each other down.
Add An Authorized User
Although this will not establish credit for your child, it is a good way to expose your child to credit card use. The primary account holder, that means you, the parent, are still the person responsible for payment of the balance. So, the parent is exposed to credit risk and must take an active role in supervising the use of the card.
Get A Debit Card Or A Secured Card
Giving your kid a debit card, like adding them as an authorized user, will not help establish credit, but it will teach them to reconcile their checking account and create the realization they can only spend what is in the checking account. The downside is that there are overdraft fees associated with checking accounts and that can prove costly, just like interest charges.
A secured card is tied to a savings account and the savings account is debited to pay the balance if a payment is missed. An advantage to a secured card is that credit is established if the bank is reporting the child's payment record to the credit bureaus. The downside is that secured cards carry high interest rates.
Use A Prepaid Card
These are just like gift cards; you would load your child's prepaid card with cash, and when the cash runs out, that's it. It teaches the child to keep track of how much is left on the card. The downside is that there are fees to re-load the card with funds.
What fundamentals would you teach your children before giving them plastic to use?