A while back, I participated in a televised call-in show about kids and money with members of the Jump$tart Coalition. In preparation, I posed questions to a group really talented, dedicated people from organizations like Young Americans Bank, The American Institute of Certified Public Accountants, and the Financial Planning Association. The result is one heck of a resource on kids and money with topics covering budgeting, credit, cars, school/college, and jobs. Yesterday, I covered kids and budgeting. Today, I’m going to share a some questions and answers about credit. (Disclaimer: not every answer will reflect the views of all participating organizations.)
How old do you have to be to get a credit card?
There is no specific age; however, creditors have their own policies regarding issuing credit to young adults. Most creditors will not issue a card to someone who is under the age of 18 because (in most states) they are not yet legally able to enter into a contract and cannot necessarily be held to the agreement. There are cards available to younger teens, but most require someone over the age of 18 to cosign. To learn your state’s laws, contact your local consumer protection office. To find yours, visit the Federal Citizen Information Center's website at ConsumerAction.gov.
Can a minor have a credit history?
Yes, if someone under the age of 18 has credit and their creditor reports to the credit bureaus, it is possible for them to have a credit history. Under the FACT Act, every consumer is entitled to one free copy of each of their three credit reports each year. To access these reports, visit AnnualCreditReport.com.
Can I keep them from getting a credit card?
No, I do not know of any way to prevent them getting a credit card. That is why it is so important that you educate your teen about the proper use of credit. For information on teaching teens about money, check out the National Endowment for Financial Education’s great publication titled Simple Steps to Raising a Money-Smart Child.
Should I list my teen as an authorized user on my credit cards?
This is an individual decision. As the primary card holder, you would be 100% responsible for changes made to the card. However, because you have control over the account, it is a safe alternative to cosigning. Just be aware that your teen might not benefit from your good payment history—ask the lender if they report to the authorize user’s credit files. Many do not.
Should I cosign for a credit card?
The decision to cosign a loan for someone or not comes down to this: Are you willing to pay the debt? If you are not willing to assume totally responsibility, you should not agree to sign for the loan. Consider a debit card as an alternative. Or, if your goal is to help your teen establish credit, they could get a secured or prepaid credit card instead (see next question).
How can they establish good credit?
The most important thing they can do is to pay their bills on time and as agreed. A secured credit card would be a good, safe way to prove they can do this. With a secured card, your teen makes a deposit into a savings account with a bank to secure a line of credit. The credit card company then issues them a card and a line of credit for at least the amount of their deposit. To get a list of major banks that issue secured credit cards, visit CardTrak.com.
Why do creditors market to teens?
While we cannot speak on behalf of all creditors, it is probably safe to say that they want their future business. In fact, some studies show that students switch cards less often than the general public and they tend to remain loyal to the company that issued them their first card.
What is the difference between a debit card, credit card & secured card?
Debit cards are not actually credit cards. Debit cards are offered by financial institutions to making banking simpler. When you use a debit card, the money is automatically deducted from your bank account. On the other hand, with credit cards, issuers allow consumers to borrow money and, if they choose, repay over time. Secured credit card issuers require you to make a deposit with their institution in an amount equal to your line of credit.
Am I responsible for their debt?
If you are not “listed on” the account in any way, such as being a cosigner, then you should not be held responsible for the debt. However, it is not uncommon for young adults to need their parent’s assistance with debt problems. Therefore, credit education and open communication are very important.
What is the worst that can happen if they cannot pay their debts?
Most obviously, they can ruin their chances of obtaining future credit for the next seven years. If the creditor decided to pursue collection efforts, what is possible depends on state laws. Each state sets laws as to what, and how, a creditor can collect on a delinquent account. Some states can force you to sell some of your assets to satisfy a judgment. To learn your state’s laws, contact your local consumer protection office. To find yours, visit the Federal Citizen Information Center's web site at ConsumerAction.gov.