I'm personally a proponent of making teenagers authorized users on credit cards. My thinking is that it gives the parent the opportunity to teach their kids about managing credit while they're at home and how to read a credit card statement (explain what the different interest rates mean, how fees are applied, etc.) while starting to build a credit file for their children. Of course, I don't have kids, so I have never had to put this into real-world practice.
But reader HKR told us recently how she's added her stepdaughter on her credit card. Here's her story and her question for you.
OK, I know this is going to sound crazy, but I just got my stepdaughter a credit card for her eighth birthday.
I know, my eyes are still bulging a bit too, so let me explain. My husband is very debt averse; he believes in working hard and paying in cash. It's sound logic, developed mostly from experience: before he met me, he ran up a credit card (or two) and it took a long time and a lot of interest to pay them off.
Nowadays, although he still manages his personal finances, I handle all the joint bills and expenses, and I'm a big believer in utilizing rewards credit cards. Last year we paid $0 in interest/fees and earned nearly $700 in cash-back rewards; the year before, we put everything for our wedding and honeymoon on the cards and got around $1,200 cash back.
My husband now sees the value in the wise use of credit. He also more strongly believes in the value of a good credit score after seeing how much of an impact credit scores have on interest rates–and consequently interest paid.
We feel have a pretty solid grasp of financial principles and skills, which we are using to improve our lives, and we want to pass that on to his daughter. Unfortunately she only lives with us every other weekend and for eight weeks in the summer. The rest of her time she spends with her mom. We all get along pretty well, but the fact is my stepdaughter's mom is not good with money or credit, and I'll leave it at that. I love my stepdaughter and want the best for her future, but I fear that she'll pick up her mom's poor money management skills.
Several of our friends live paycheck to paycheck with no thought for bettering their situation, and I'd hate to see my stepdaughter end up that way, too. Life can be so much better, and I want her to be able to experience it to the fullest.
To that end, we try to impart what money lessons we can: incorporating a chores-based allowance system, teaching her the value of saving, and taking her to garage sales to let her learn about making good purchasing decisions through trial and error. We teach her about charity too, but take a service-based approach to that.
As I was driving home the other day, it occurred to me that one day we'll need to teach her about responsible use of credit, and it'll probably be tough. I considered my own financial upbringing: my parents refused to co-sign anything except student loans for me, which overall I believe was a good policy. I couldn't help but think, however, that it would have made things easier if I'd understood more about credit, and had good credit to start off with rather than no credit. Light bulb moment: I could help my stepdaughter start building credit now so that when she needs credit in the future — whether for a car loan, cell phone, or apartment — she'll have it, without needing a co-signer. Furthermore, this could be a great way to introduce the concept that credit cards actually do correspond to cash.
My first credit card was a Walmart store card with a $400 limit that I got when I was 18 in order to get 0 percent financing on a $200 MP3 player (maybe not the best reason to get one, but unbeknownst to me at the time, it helped build my credit). I still have that card, although I rarely use it since there are no rewards. We used this card since it was available and we didn't want to apply for a new card. My husband thinks this is a great idea, and we have spoken with my stepdaughter's mom, and she is agreeable to the idea too. So I added my stepdaughter as an authorized user on this card.
A card with my stepdaughter's name came in the mail, and the card's credit history should show up on her credit report in the next month or so. Whenever we go to Walmart with my stepdaughter, we'll let her use her card to buy a few of the groceries and then give her cash to pay for them, which we will do by going to the service desk immediately after the transaction is complete.
When she's older, I plan to teach her how to pay cards off online, which we will also do as soon as we get home from the store. By starting this routine at 8, she will have 10 years to develop a habit of only using cards when you have cash and paying them off promptly. She will simultaneously be developing a good, long credit history.
Of course, there's always the possibility that she will misuse the card, particularly when she hits the teenage years. Using a store card with low limits should help minimize the damage, and the card will stay at our house, used (theoretically) only under our supervision. If she does sneak it out for a shopping spree, however, we can use that as a lesson too, both on the subject of interest and the repercussions of spending more than you have (e.g., lots of extra work).
Has anyone else done this, or something similar? If so, how did it work? If not, what do you think of the idea?