Would you give your 10-year-old a credit card? Many parents would; in fact, a recent study by T. Rowe Price found that nearly one out of every five parents with children between the ages of eight and 14 have given their child a credit card.
Are you considering joining this group of parents? If so, you need to make sure that you ask your young children these questions first. And make sure you get the answers you need to hear to inspire confidence that your youngster is ready for that piece of plastic. (See also: 13 Things to Teach Your Kids About Credit Cards)
What is the credit card for?
If you’re giving a kid as young as 13 or 14 a credit card, it’s safe to assume that this card is to be used only for a specific purpose. Maybe you want your child to use the card to buy a train pass each month to get back and forth from school. If that’s all the card is to be used for, spell it out clearly so your child understands and isn’t tempted to use it to buy a new shirt or video game. (See also: 4 Reasons to Add Your Teen as an Authorized User on Your Credit Card)
What is the spending limit per week or per month?
You’ll need to set clear spending limits before handing over a credit card to your kids. Maybe your kids can only charge up to $150 a month. Or maybe their spending limit is $300. Whatever it is, make sure your kids know this limit and understand what it means. Ask them about it early and often. You want your kids to understand that the spending limit is a rule and not a suggestion.
Make it clear, too, that if their monthly limit is $200 and they charge $150 in the first week, they can now only spend $50 for the rest of the month. Don’t let them break that spending limit. If you do, that limit become meaningless. (See also: Should You Cosign on Your Child’s Credit Card Application?)
Who pays, and how much?
Before giving your children a credit card, you’ll need to establish the payment rules with them. Explain how credit cards work, and that if the bill isn’t paid on time, the account will be hit with late fees. Make sure that they understand the consequences of not paying their balances off in full each month and that high interest rates can make credit card debt grow quickly.
Once you’ve asked your kids these credit card basics, establish ground rules for how the card is to be paid. Maybe you’ve agreed to pay the card in full each month, as long as your children don’t spend past a certain limit. Maybe you and your children have agreed to split the monthly bill, with your children covering their half with allowance money or withdrawals from their savings accounts.
Whatever arrangement you agree to, don’t change the rules at the end of a month. Your children might complain that they have to pay half the credit card bill. Don’t let their complaints convince you to cover the whole bill. This won’t teach your children about financial responsibility.
Do they understand the consequences of misusing their cards?
Have consequences in place if your child overspends with a credit card or purchases items they’re not supposed to be buying.
Maybe you agree that your child can charge $150 a month maximum. If your child spends $200 in a month, they should know that there will be consequences. Perhaps they will be responsible for repaying what they overspent, whether that repayment comes in the form of extra chores, a withdrawal from their savings account, or a reduction in next month’s spending limit.
If your children use their cards to purchase something they aren’t allowed to buy — say an in-app purchase or a fast food meal — there should be consequences, too. Maybe your child will lose their card for a month or on a permanent basis if they don’t follow your buying rules. Spell these rules out before you give them their own credit card. (See also: 7 Important Lessons Frugal Parents Teach Their Children)