Should You Get Your Kid a Credit Card?
I got my first credit card when I was 24 years old. Prior to that, I made due with debit cards. My parents instilled in me a fear of credit card debt, and so even after I got my first credit card, I religiously paid off the balance in full every single month.
Getting a credit card so late in life hurt me a bit: my credit limits were hilariously low for the first couple of years I had my card and I had a middling credit score until I was in my early 30s. Despite avoiding credit card debt, I never really learned anything about points, cash back, or other membership benefits.
So, when my wife asked me whether we should get credit cards for our kids, I had to admit a fair degree of ignorance. When can kids even get their first card? Which providers offer them? What are the benefits? What I learned is that there are material benefits, and if you go with certain banks, you can limit risk to you and your children by setting authorized user limits. In short, I think it makes sense to give responsible teenage children credit cards.
A Very Condensed History of Credit Cards
For anyone interested, Visual Capitalist has a neat infographic about the deep history of credit. I’m just going to focus on recent history for the sake of brevity.
The Origin of Credit Cards
Fun fact: Edward Bellamy created the idea of a credit card in his 1888 science fiction time travel story Looking Backward. In it, a character by the name of Julian West goes into a prolonged coma in 1888 and wakes up in the year 2000. He then gets a tour of the magical world of 2000 AD from a guide, Doctor Leete, who explains all about the socialist paradise of the future. Readers in the US loved the book and it enjoyed critical success. But despite it’s rosy depiction of socialism, censors in Tsarist Russian banned it. No good deed goes unpunished.
Modern Credit Cards
Starting at around the same time (late 19ths century) charge cards became common in the US. These functioned much like debit cards do today. “Charga-Plates” supplanted charge cards in the 1930s. Department stores adopted Charga-Plates particularly fast [source]. Regular customers received a small card approximately the size of a military dog tag which was given a thin coat of ink and pressed onto a receipt to record purchases.
1934 marked the creation of the Air Travel Card. By 1941, 17 different airlines offered Air Travel Cards. Then, in 1950, Ralph Schneider and Frank McNamara created Diners Club which is the first instance of the modern credit card. American Express and Bank of America followed suit in 1958. The BankAmericard was the first recognizably modern credit card.
Another fun bit of trivia: BoA used to mail BankAmericards in bulk to customers that identified as “low risk.” But according to LIFE magazine, they also mailed cards to “unemployable people, drunks, narcotics addicts, and to compulsive debtors.” This tactic was controversial, but very profitable. By the 1970s, lawmakers in the US made it illegal to mail cards to customers. Banks could only mail applications for credit cards. Since the 1970s, Americans have used credit more and more [source]:
Despite looking, I couldn’t find much about when kids were first allowed to get credit cards. So for all intents and purposes, authorized users appear to be another gift of spontaneous generation.
How to Give Your Kids Credit Cards
First, minors in the US can’t own credit cards on their own. If your kid is below the age of 18, you’ll have to give them a card through your account. They will be an “authorized user” and you will be on the hook for paying their bills (curtesy of CardRates):
Here’s a brief overview of which banks offer authorized accounts and at what age:
To apply on behalf of your child, you start with an application from your account.
Depending on how trustworthy your kids are, you may need a way to cap their spending. American Express, Barclays, and Citi all allow you to set spending limits for authorized users (from NerdWallet):
How Much Does it Actually Help Your Kids?
This is the question that I really wanted to better understand when I set out to write this post. But as with everything that touches credit scores, the exact data is hard to locate. There’s no publicly available formula that explains the credit score impact of giving your kid a credit card at age 14 vs age 15. This makes sense: credit card companies don’t want you to know! But of course, we consumers do, and so, true to the name of this blog, I had to overthink things a bit.
How Credit Scores Are Calculated
The major categories that go into your credit score are pretty well understood. Here’s a breakdown of those categories from The Young and Invested:
Below, I make some predictions about how authorized users influence these categories. Note that this is pure speculation on my part, I’m not a credit card company and you should take all of these measurements as best guesses from some random guy on the internet.
How Much Can You Help Your Kid’s Credit Score?
Credit card companies won’t tell you exactly how much benefit there is in creating authorized user accounts for your kids. Here are the OverthinkingMoney best guesses to give you some guidance.
|Category||% of Credit Score||Best-Guess OM Credit Score Impact||TLDR Reasoning|
|Payment History||35%||⬆High||Authorized users have a payment history. New credit applicants don’t.|
|Total Available Credit||30%||⬆High||Your credit line will be huge compared to teenage spending needs. This should help your kids substantially.|
|Types of Credit||10%||⬇Low||You’re unlikely to give your kids more than 1 or 2 cards. Their credit variety will almost certainly be low.|
|Credit Inquiries||10%||⬇Low||You won’t be doing any hard credit checks on authorized accounts, so no benefit here.|
|Length of Credit History||15%||⬆High||Authorized users have credit history, new credit applicants don’t.|
This is the period of time over which a credit card company has observed your purchasing behavior. It’s the single largest factor in determining your credit score and for good reason: the more payment data available, the better banks can determine the risk of lending money to you.
Here, your ability to impact your children’s credit score should be quite high. By creating authorized user accounts for them early, you can give them years of payment history by the time they are young adults. If you set their spending limits low, generating that paper trail is also fairly low risk to you.
Total Available Credit
The average credit limit for Americans is $30,233 [source]. Most credit cards permit customers to request greater credit limits every 6-12 months [source]. The average amount you can increase your credit limit is 10-25% [source].
Let’s assume that you are like me and got your first credit card at age 20. Young people start with much lower credit limits. Let’s assume you started with only $10,000 and you request a 15% credit line increase every year. You have your first kid at age 30. By the time your kid is 10 years old, you could have a credit limit of ~$160,000. Okay, you probably wouldn’t actually have that much credit. Eventually, high credit limits hurt your ability to be approved for certain purchases because you are at risk of accidentally over-extending your finances. But you could easily achieve a credit limit of $60,000, which is double the national average.
Compared to common teenager expenses (meals at fast food restaurants, gas for a family car, computer games), $60,000 is an enormous amount of money. By putting your kid on your account, your kid gets to take advantage of your credit limit which will make them much more creditworthy in the eyes of banks than if they started their credit line themselves.
Types of Credit
Most American adults utilize several different kinds of credit on a regular basis. Between my wife and I, we have mortgage credit, specific department stores, and airlines to name just a couple.
But you aren’t likely to add your kids as an authorized user on more than 1 or 2 of those accounts. Why? Kids don’t typically need to purchase furniture, air fares, or homes. And there are administrative costs to managing authorized accounts.
What’s most likely is that you add your kids to one, maybe two of your accounts when they are young. This won’t help them much when thinking about different types of credit.
If you do it right, no credit ratings agency will inquire about your kid’s credit scores. So you probably can’t help them too much in this department.
Length of Credit History
Like payment history, you are able to give your kids a big leg up here. If you add your kids as an authorized account, they go from having no credit history at all to having years of history before they become eligible to own their first credit card for themselves.
The Risks of Giving Your Kids a Credit Card
The benefits outlined above aren’t free. There are some pretty obvious risks that you should consider before giving your kids authorized user accounts:
- If your credit score isn’t great, consider letting your kids get a clean start. If you’ve ever had to declare bankruptcy, you’ve missed a bunch of payments, or have been referred to collections, consider intentionally not adding your kids to your accounts.
- If your kids are reckless with money, think twice. Especially if you get an authorized account through a credit card company that doesn’t offer spending limits, think twice about giving your kids credit cards. You are ultimately responsible for every dollar they spend!
The risks here aren’t hard to think through. If the thought of giving your kid a credit card makes you tense up with worry, listen to your gut. The benefits above don’t outweigh the risks if you have cause to be concerned about their behavior or your ability to cover for it.
Having done the research here, it seems pretty cut and dry that if your kids are responsible, you should get them credit cards when they are fairly young. There doesn’t seem to be an optimal age that maximizes the benefits to them. Apart from spending limits, there also aren’t a lot of features or advantages offered by specific brands. I would personally not feel comfortable giving my kids credit cards without a spending limit. I’ve also never used Barclays or Citi, so I’d probably opt to give my kids authorized user accounts through American Express.
Ultimately, which card provider you choose is probably a lot less important than the fact that you did it at all. So, if you were on the fence, go get your kid a credit card – they’ll probably thank you later when they realize they can easily qualify for all sorts of stuff in early adulthood.
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