When young people reach their 18th birthday, they’re eligible to vote, buy a lottery ticket, and get drafted into the military. What they cannot do, according to the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, is apply for a credit card without a co-signer or steady income.
As the adult responsible for beginning a young person’s credit journey, you’ll want to avoid putting them into a situation where they’ll need a debt consolidation loan in a few years, so selecting the right credit card needs to be a carefully thought-out process. So here’s a list of points to consider when helping the new adult in your life choose a credit card.
1. Calculate Your Teen’s Earnings Potential
If your 18-year-old has a job and can prove they have a steady income, they can apply for a credit card on their own, but they will have a better chance of approval if you co-sign the application. Before doing this, verify their income and evaluate their earnings potential. Is the job secure? Are there chances for advancement?
2. Discuss Interest Rates and Credit Scores
Many of us have looked back at our teen years and wished that we knew then what we know now. Imparting some of your knowledge about how interest rates and credit scores work will help your teenager manage their new credit card. They’ll still make some mistakes along the way, but they can’t blame them on ignorance.
3. Consider a Secured Credit Card
A secured credit card is one where you make a deposit into a designated savings account that matches the credit limit on the card. Secured credit cards are ideal for teens because they limit the amount they can spend. They also provide an opportunity for young people to learn how to use a credit card and make monthly payments.
4. Add Your Teen to Your Credit Card Account
This is risky because irresponsible spending could lower your credit score as well as your teen’s. If you’re comfortable with that and have faith that your teen will use their newfound spending power responsibly, this is one of the easiest ways to build their credit history. Most credit card issuers offer an option to add an authorized user on their website or mobile app.
5. Set Strict Spending Limits
Setting strict spending limits is something we could all benefit from. Getting young people accustomed to living within their means can only benefit them later in life. Obviously, a secured credit card will accomplish this automatically, but if you co-sign or add them as a user, make sure you carefully monitor their spending.
When teens apply and get approved for credit on their own, you can still set spending limits. Make it clear that financial assistance, which they’ll likely need at some point, will not be available if they are careless with their credit card. This may seem harsh, but you’ll be doing them a favor by being somewhat rigid in this area.
Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.