Ask Bill Hardekopf when to introduce kids to credit cards, and he has a definitive answer: 11th grade. If they're planning to go to college, they'll soon need the emergency access to cash that a credit card provides.
A card will also help them develop a credit score so that they'll be able to qualify for auto and home loans later. And by helping kids get a credit card when they're still at home, parents have the time to give their offspring a crash course in managing debt, he said.
"It worked really well for us," said Hardekopf, chief executive of LowCards.com, a credit-shopping website. "Our kids are all financially responsible and had five years of credit history when they got out of college and started applying for loans. That gave them a real advantage."
However, when it comes to the best way to get kids that first card, there's no definitive answer. Parents have four potential options. They can co-sign for their kid's card, make the child an authorized user on a parent's account, help them establish a banking relationship that comes with a low-limit card or suggest that they get a secured card.
It's worth noting that kids used to be able to get their own cards, without parental involvement, but the Card Act of 2009 put a kibosh on offering credit cards to people who don't have visible means of repaying that debt, such as a job or trust fund. Thus, parents who want a full-time student to get access to credit may need to help.
The best choice is likely to depend on both the student and his or her parents. Here are the options, their benefits and detriments.
Co-signed card: Hardekopf chose to co-sign for his kids, but for many parents this is an accident waiting to happen. That's because the primary accountholder -- in this case, your child -- is the only one who gets a bill. If he or she fails to pay it, the co-signers may not know until the debt becomes seriously delinquent and does damage to both the child's and the parent's credit score.
Moreover, the child usually can raise his or her credit limit without notifying the co-signer. Thus, if you need to pay off the card to save your credit rating, the tab may be higher than you expect. This combination makes co-signing for credit a good option only when you have highly trustworthy kids.
Hardekopf further reduced the risk by making sure his kids got their plastic while still living at home. That way, the bills would come to his address, allowing him to monitor the kids' behavior. The Hardekopfs also demanded that their kids open the bills promptly and pay off the balances completely each month.
For those with the time to monitor and kids with the right disposition, Hardekopf's approach can be a great way to teach money skills. But if your kids are less responsible or cooperative, consider other methods.
Authorized user: Another option is to make the child an authorized user on one of your existing accounts. Typically, this is as easy as calling your credit card company and asking them to add the child. They'll issue a second card in the child's name, which the child can use just like a card of their own. The only difference? The child's charges appear on your bill.
Here's the downside: Although you may have an agreement that requires your child to pay for their own charges, as far as the law is concerned, you're liable for every penny. If your child goes wild over Spring Break, you could be left with the bill.
On the bright side, your child cannot raise the credit limit on this card, and you can monitor their spending as actively as you'd like. If the child's credit behavior is bad, you can rescind their authorized user status. You also can make the child an authorized user on a card that has a small spending limit.
When it comes to helping your child establish a credit score, the authorized user approach has some advantages. That's because the authorized user usually gets credit for the entire payment history on that card. Thus, if you had this card for five years and paid your bills religiously, your child will piggyback on your good payment history, getting credit for more years of money management than really apply.
Bank card: Some banks will agree to provide kids with a low-limit credit card when they open a checking account. These cards are not "secured" by their bank deposits and usually charge high rates on revolving balances. But they are a great option for a responsible child willing and able to pay off the entire balance each month.
It's worth mentioning that almost all banks automatically offer a debit card with student checking accounts. Don't be fooled by the Visa or MasterCard logo. These are not credit cards, and debit cards do nothing to establish a credit history. If you want to help your child build a credit score, you have to ask for a credit card loan.
Secured cards: If your child is not particularly responsible with money, the best option may be a secured card. These cards are issued with low credit limits and are normally fully secured by a corresponding deposit in the same bank. In other words, if you deposit $300, the bank will give you a credit card with a $300 (or less) spending limit.
However, most secured cards charge annual fees, are loaded with penalties for bad behavior (such as paying late or going over the credit limit) and the rate you'll pay on a revolving balance is a lot more than what you might earn on your deposit. So, secured cards can be expensive.
On the plus side, your economic risk is typically just the amount of the deposit. And some cards come with bells and whistles that might be helpful. For instance, Capital One's Secured card, which has a reasonable $29 annual fee, allows kids to monitor their credit score and use a credit simulator to see what would happen to their score if they missed a payment or continued to pay on time over an extended period.