We could argue all day about whether kids need credit cards. The concept of need is pretty subjective, especially when it comes to kids -- one day they'll claim to "need" a new iPod, and the next, it's trendy kicks or the latest game system. But many parents and their progeny are already sold on the benefits of plastic (especially for emergencies), making them ripe pickings for bad-guy credit card companies. Don't let yourself or your child fall prey to one of the lousy lenders.
Before you even venture into looking at specific credit card offers, you'll want to consider:
- Your own risk tolerance,
- Your child's spending habits (and level of responsibility), and
- Why you want your child to have a card.
If your child has low impulse control and the card is to be used only for emergencies, consider a secured credit card: one that is backed by money you have deposited in a savings account. That way, your child's spending is capped by something other than the often sky-high credit limits on regular credit cards. You'll want to watch out for the fees and interest rates, though, since they can be surprisingly steep.
Should you decide to choose a mainstream credit card, you'll want to help your child evaluate the following:
1. Fees. Does the card come with an annual fee? What about other fees, including those for late payments, cash advances, balance transfers, international transactions, and charging over the credit limit?
Critical info: Take some time to explain to your child exactly what actions (or inactions) trigger different types of fees. A first-time credit card holder isn't likely to know, for example, exactly how damaging a late payment can be both to one's credit rating and wallet.
2. Interest-free days (sometimes called the grace period). How long does the company allow between the purchase date and the time interest begins to accrue? Obviously, for the consumer, longer is better.
Critical info: Make sure your child knows that there isn't any grace period at all if you carry a balance on the card. The interest accrues for the duration of time until the balance is paid off in full.
3. Introductory rates versus the real rate. Visit any college campus and you'll find lenders falling all over themselves to get their hands on the swarms of credit card virgins. All of the low introductory rates have a way of vanishing after a few months, however, leaving a real rate that is not nearly as attractive.
Critical info: Explain that credit card companies can change their rates at any time with written notice. Your child needs to check statements regularly for rate hikes or changes since written notice may come in the form of teensy-weensy print embedded deep in a monthly statement. Note, too, that credit card issuers may have it in writing that they can hike your rate if you are late paying any bills, not just theirs.
4. Rewards programs. If the card isn't exclusively for emergencies, your child may benefit from one that is linked to a rewards program. In fact, you and your child could even start chipping away at student loan debt if you get a card like the Citi Upromise card. Link your Upromise rewards, earned when using its credit card, to "an existing eligible [student] loan" to help pay down the balance.
Critical info: Emphasize to your child that a rewards program is a nice perk, but not an excuse for maxing out on spending.
After you explain what to look for, encourage your child to check out a site like Bankrate.com, which allows consumers to compare credit card offers in a few easy steps. It's important to learn how to spot a better-than-average credit card deal.
No matter what the specifics on that first credit card, you want your child to treat it with a healthy respect. Teach your kid how to beat the credit card companies at their own game by paying off the balance in full (and on time) each month.
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This article is adapted from the Motley Fool Green Light "Money Answers" archive, which features more than 100 articles on personal finance topics such as taxes, credit, and beginning investing, organized by subject and life stage. For access to this content -- plus the current newsletter, back issues, members-only discussion boards, and advisor blogs -- take a free 30-day trial today!
Fool contributor Elizabeth Brokamp is a licensed professional counselor who regularly talks money with her honey, Robert Brokamp, editor of The Motley Fool's Rule Your Retirement newsletter. The Fool has a disclosure policy.