Well, the answer to this question will probably vary greatly, depending on the child. As most credit card companies don’t have an age limit on authorized users, mom and dad can add little Johnny any time they want to. But, financial education needs to start early in order to prepare children for responsible credit card use. At 18, they’re legally able to apply for their own cards; however, children really should have an understanding of finances and credit cards long before that.

Most experts agree that 7-year olds are probably not ready to use mom and dad’s card as an authorized user. A mature 12-year old may do well with their parent’s card, though if your preteen is a bit impetuous when it comes to spending, you may be better off using reloadable gift cards or debit cards to practice with. Now, we’ve posted before on how to teach your kids about money and so forth and the same basic principles apply here. However, I’m going to include some tips to help parents develop the credit card skills necessary for success for kids at three different stages: preteen years, teenage years, and young adult years.

Preteen Years

Financial education in general should begin around 4-5 years old. You can wait a little longer if you feel it necessary, but this is typically the age where they begin to understand the concept of money. I don’t recommend starting any later than 6-years old. At this stage parents play an integral role in how much their children understand where money comes from and how it’s used, so it is important that parents take the time to really work with their children.

In terms of building good credit card skills, parents can provide a safe environment for children to learn how they work. It may prove to be too cumbersome to try and explain the ins and outs at this stage; however, by becoming their first creditor you can instill the lessons they will need for later. To become their creditor, lend them the money they need to purchase the item they’ve been coveting, but give them terms – just as a bank would. Explain that if they are late with their payments, the amount they have to pay back will increase and if the money is never paid back, then the item is taken away.

Once they’ve mastered the concept of repaying the money, it may be a good idea to give them a dry run using a reloadable gift card. Explain that they can put their money on the card to be used at stores instead of carrying cash. Because the concept of credit cards is rather abstract to kids in this group, using the gift card affords parents a little illustration. The idea of a credit card usually triggers the thought of “free money” to children, when we all know that’s the furthest thing from the truth. Using the gift card puts their cash in these abstract terms and they can see that they’re still limited to what cash they have on the card. They have a limit that they can’t exceed. Once it’s gone, it’s gone.

At this stage, children should learn that borrowing money costs money and that when you borrow money, you make a promise to repay it. Failure to do so results in consequences. Combining that lesson with the gift card lesson gives preteens the foundation they need to understanding credit cards.

Teenage Years

Once they’ve mastered the lessons from the preteen years, you can add them as authorized users to your credit card – that is, if you’re so inclined. Even if you’re a little wary of doing so, it really is beneficial to your child’s financial education. If they make a mistake or error in judgment, then they’re learning in a safe environment. However, parents are still responsible for the bill, so it is important to make sure the teen understands that they just can’t go wild. The credit card is to be used for emergencies only and be sure to spell out what constitutes an emergency and what doesn’t.

The major downside to this is obviously the risk to the parent’s finances. If a child is reckless about their spending, it could cause problems. This is why parents must talk with their children about what they are spending and it’s a good idea to monitor the account regularly. However, parents and teens both need to understand that any damages done to the credit account also affect the teen’s credit report as activity is reported on an authorized users credit file now. It may help to explain that poor performance and bad choices can negatively impact them as well. They may be more inclined to watch what they’re doing if they know it impacts them – let’s face it, the teenage years are all about what’s good for them.

For those parents who are concerned about their children making financial mistakes with their credit cards, try a debit card. A debit card will allow you to still monitor your teen’s activity and discuss their purchasing choices if need be. The thing to remember here is that you will still have to be on the account as a responsible adult, so if the teen overdraws the account, you’re responsible for bringing it current. You can use it to teach the teen about over the limit fees on credit cards and how much that eats away at their money, because they will be charged for overdrawing the account.

The lesson at this age is that there are benefits and drawbacks to having credit. While it makes things easier in the event of an emergency to have something on hand, being reckless can create financial problems later down the line.

Young Adult Years

These are the years where your child can get a credit card themselves. By this point, they should have a solid understanding of finances and the best ways to manage their money and their debt responsibly. Parents should let their children spread their wings, only offering advice as needed and not in a forceful way. Experience is often the only way people learn.

Here’s the part that’s tough for many parents. Do not rescue your kids when they make financial mistakes. Studies have shown that students whose parents have bailed them out when they get into trouble have higher average balances on their cards because there is no recourse for their actions, mommy and daddy will simply take care of it. You’re not doing them a favor by teaching them to rely on you. Those students who knew that repaying the card was their sole responsibility had lower overall balances and managed their money better. If you want to offer your financial help in other areas, fine. But don’t make the credit card payments for them. They need to learn.

The lesson learned at this age is about building a good credit file. They need to understand that they must be independent in their financial matters and they must take care to protect their credit rating.

Let’s discuss what you’re currently doing with your kids. Have any of your tried the suggestions I’ve listed? Are you doing something else? How’s it working out?

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5. Teach your Children about Finances Part – II