Giving your kid access to your credit card account might make you squirm, but there are some good reasons to do it. Teens need to be educated about credit before they leave the nest and get their own credit cards. While you could just hand them your credit card whenever they want to make a purchase, there are extra benefits to making them an authorized user on your account.
An authorized user gets a card in their own name and can make purchases just like the primary user on the account. However, only the primary user is responsible for paying the charges. That sounds scary but there are ways to handle the situation so that your child gets the most from it without landing you in debt. (See also: What You Need to Know About Adding Another User to Your Credit Card)
Let’s look at the notable benefits that come with making your child an authorized user on your account.
1. Lessons on Credit and Debt
Teenagers may not really understand what credit is until they experience it firsthand. By introducing teenagers to credit early on, they can gain an understanding of what it means to owe someone money — and that every dollar spent must be paid back. They’ll also learn about credit card interest this way, and how not paying your balance in full means owing more money over time.
To make this lesson effective, you’ll need to establish with your teen that they are responsible for paying the charges they make and any interest they incur. If you simply pay for all their purchases, they’ll learn very little about responsible credit card use.
For example, your teen might use their authorized user card for new clothes at the mall without a care in the world. When the bill arrives, however, if you have made it clear that they will have to pay for the charges, they’ll be forced to face the consequences of their spending.
If they’ve kept the cash on hand to pay their bill, they can be proud of that accomplishment. If not, they’ll learn what it means to carry a balance and pay interest. And when those $49 jeans end up costing $61, they might feel the pain of their decisions in a way no other method of learning can convey. (See also: 13 Things to Teach Your Kids About Credit Cards)
2. Lessons in Budgeting
The example above presents a great way to introduce kids to another adult concept — budgeting. Whether they’re buying clothes at the mall or hitting the movies with friends, they should learn how to budget their money so they can pay their bill when it comes due.
If a teenager charges on their card often enough — and sees that bill roll in time after time — they’ll get used to the fact they need to keep enough money handy to cover their purchases.
This lesson can carry through to nearly every aspect of their lives as they become adults. They’ll need the money in the bank to cover the mortgage or rent payments one day, for example. They can start developing good habits early by learning to anticipate bills and creating a budget that works with the amount of money they earn, whether it’s through an allowance or a part-time job. (See also: 7 Important Lessons Frugal Parents Teach Their Children)
3. Emergency Spending
If you’re not too keen on handing your kids cash every day, making them an authorized user on your credit card is a smart alternative. With a credit card for emergencies, your teen may be less likely to waste your “emergency money” on a frivolous purchase. After all, a credit card will create a paper trail that shows parents where that money was spent.
And since emergencies can happen at any time, it’s nice to know your kids will have money in the form of a credit card if they end up in a pickle.
4. Credit Building
Perhaps the most important reason to add your child as an authorized user is to help them build a credit history. As an authorized user, the action on your credit card account will likely be reported to your teen’s credit report. Assuming you use the card responsibly and keep the balance low, your teen will benefit from your good habits and, over time, earn a good credit score. That foundation can give them a leg up in the financial world for years to come.
Of course, adding your child as an authorized user is just the first step. Once they get old enough, they can apply for their own student credit card that can help them approach credit use with baby steps.
Adding Your Teen: What to Watch Out For
While adding a teen as an authorized user to your credit card account is certainly beneficial for them, that doesn’t mean it’s risk-free for the primary cardholder — you. As the account owner, you’ll be responsible for any charges your teenager racks up — and that’s true whether they make a good-faith effort to repay or not.
One way to prevent a catastrophe is to set a spending limit on your teen’s authorized user card. With a spending cap in place, their card will be denied if they try to charge more than their limit allows. Unfortunately, only a few cards — most of them American Express cards — allow you to have a separate spending limit for an authorized user.
Worried you won’t be able to keep track of your purchases and theirs? One strategy that can keep things straight is to add your child as an authorized user on a credit card you rarely use. That way, their purchases won’t become intermingled with yours and you can easily track what they spend and how much they owe.
You can also keep a running tab on what’s going on with your card by creating phone or email alerts for every time your account is used.
Whatever you do, make sure to set rules in writing, so they’re crystal clear. Let your kid know exactly what they’re allowed to purchase, how much they can spend, and how repayment will work. If they appear to be getting in over their head, take the card away from them.
Some children need to gain more maturity before handling credit, and there’s no sense harming both of your credit records. In those cases, getting them a prepaid debit card may be a good interim measure for teaching them about budgeting. Prepaid cards don’t help them build credit, but they can’t hurt anyone’s credit record, either.
Whichever way you go, it’s important to start teaching your kids early about credit, debt, and bill paying. Your kids will be adults before you know it. Let them learn about money while they’re still under your guidance, and they might not have to learn every lesson the hard way. (See also: 4 Signs You’re Teaching Your Kids Bad Financial Habits)