Giving Your Kid their First Credit Card

Credit or debit card better known as plastic money has now become a need of the hour. So how can the Generation Y stay without it? Often children even before starting their college own a credit card. But the major concern about credit card is its debt. If you are a proud owner of a credit card then you must certainly feel proud to pay that you have a debt on time as well. Many youngsters do not realise the importance of credit rating at their age. It is the duty of their parents to make them understand and also keep a strict check on their spending.
On the other hand it is important to teach children how to manage finances and how to manage credit. They should be well aware of the advantages of a good credit score and rating.

Following are some of the advantage of having a good credit rating which needs to be understood by kids.

  • Lower rates of interest on auto as well as home loans
  • Lower insurance premium
  • Access to all the A-grade banks
  • Access to better and steady service by financial institutions

The obvious question every parent must ask before getting a credit card for their kids is whether or not they need one. Following are some of the reasons which would help you answer this question.

  • Building credit:

    Getting a credit card helps children learn the importance of credit and help them realise the importance of building credit. The faster the children realise the importance of credit score lesser is the possibility of them getting into credit debt. Most people in haste use their credit cards very irresponsibly and end up doing more damage than good to them.

  • Creating healthy habits:

    It's a good idea to provide them with a credit card only under your supervision. Children tend to listen to their parents and are open for advice unlike when they grow older.

  • Avoiding impulse purchases:

    Credit card with a small credit limit would make them realise the importance of money and controlled expenses. This also makes them more responsible. You can also pass on some financial decision making and make them responsible for payment of their phone bills, transportation etc.

  • Providing a safety net:

    If a credit card is used cautiously and within limits then they act as a safety net which can be used in case of unforeseen circumstances when need of cash arise.

Dos and Don'ts of credit card

There are few things which a guardian must look while introducing a credit card to your children.

  • Pick the right card:

    There are several banks which offer dependant cards which are attached with the primary card. These cards often have limited accessibility and rights of use. This feature helps in keeping a check on the expenses made on the credit card and also keeps an eye on the kind of transactions made. One must conduct proper research while choosing a credit card which is best suited for a child. Many online website provide with very good advice regarding a credit card.

  • Read the instructions properly:

    Once you receive the credit card, you would also receive several broachers and flyer along with it. Remember to read them carefully they may contain important information about interest rates, fees credit limit and due dates attached with the card.

  • Password securities:

    Remember to change the password immediately to a one which is preferably alpha-numeric and easy to remember. Don't write your user name and password anywhere. Give special instructions to your children about not sharing their password with anybody.

  • Internet transaction:

    Pay special attention while doing an online transaction. Stay away from fishing sites. As a guardian it's your responsibility to teach your child about credit card information loss.

  • Timely payment of bills:

    Educate your child to pay bills on time, one can also set an auto debit or make use of online banking, this saves a lot of time and effort.

  • Limit:

    Set a well-defined limit for your child, it's a good idea to spend only 30-50% of the set credit limit in order to avoid running out of credit.

Following are the things which a guardian must ask his child to avoid.

  • One must always avoid taking cash advances on credit card. These cash advances charge a very high interest rate. It is better to draw cash from an ATM or from bank using a cheque.
  • Never pay your credit cards bill late. This may impose a late fees or a penalty on you thereby increasing your expenditure. This also affects you credit rating.
  • Keep a strict check on your expenses; try not to exceed your credit limit.
  • Do not indulge yourself in high credit card limit of platinum cards. Since it's your first card therefore it's better to learn to use the card effectively then move to higher credit limits.
  • Do not take responsibility of your kids' credit cards. Make them realise that it's they who have to take care of the expense. This would help take the onus and be a better responsible individual.

Choosing the right type of credit card for your children

  • It is important to look for the best possible credit card for your child who not only helps in learning the art of using a credit card but also helping him in times of need. The best possible time to introduce your child to a credit card is during high school or once he turns 18. There are special credit cards which are known as utility cards such as HP petrol card which can be used at oil stations and also gives them the liberty to make small purchases other than oil stations.
  • To start with, a credit card must have a low credit limit along with low interest rate and low annual fees. Seek piggy banking that is attached to your credit card with your kids' credit card to keep an eye on the expenses.
  • Also while seeking a credit look for reward points which can be accumulated and redeemed for gifts and rewards.

Following are the signs which help in assessing that your child is ready for a credit card.

  • Carefully see whether your child can manage cash properly. Is he/she able to manage expenses well with the limited pocket money they get? Do they ask for extra money to full fill their needs? If they are able to do well with a limited amount of money then they may be able to handle credit card with limited credit limit.
  • Before you get your child a credit card make your children comfortable with banking. Make them visit a bank frequently and establish a comfort level with bank and banking instruments. If your child is able to manage a savings account and realises the importance of contributing to a savings account at frequent intervals and is comfortable with cheque then they may be ready for a credit card.
  • In order to start using plastic money first start with introducing a debit card, because this is still regulated and attached to the savings bank account. It also helps in limited spending and transactions can easily be tracked.
  • Talk to your teens about financial terms. Find out whether they actually know the difference between debit and credit. Many teens like to use plastic money as a status symbol without knowing the responsibilities of obtaining a credit card.
  • If your teens realises that the bills of the credit card is their responsibility then you can go ahead. In order to pay off the bill they may have to take up part time job. If your child understands that it is his responsibility to take care of the bills and not your headache to pay off bills then he is ready to get a credit card.
  • Your children need to understand that what they need to do if any of the transaction goes bad. He should know how to take care of fraud transaction. There have been many cases where there have been fraud transactions which were not even authorised by the user. In such a case there has to be a fraud chargeback in order to reverse the payment. If your children can handle this then they are ready for a credit card.

In short credit card should be treated as a short term loan which needs to be paid off as soon as possible to avoid adverse consequences. If your child understands how to take care of credit and use it responsibly then credit card would serve as an asset than a liability.

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