Last week, I told you that I had a “crazy” plan for teaching children about credit. And I explained that teenagers who do not know about managing credit might be in trouble when they leave the nest. On the other hands, if you teach children how to build credit, they will have an advantage.
This week, I’m going in-depth with Step One of my seven-step plan for teaching children about credit.
(Step One, incidentally, is the step that sounds the most crazy!)
Teaching Children About Credit: Step One—Add your children as authorized users to one of your existing credit card accounts.
Let’s get this out of the way: an authorized user is someone who has permission to use your credit card, even though you are responsible for paying the bill. That’s right—an authorized user has no legal obligation to pay a bill.
Nonetheless, I think you should add your children as authorized users to one of your existing credit cards.
But let me be very clear: Unless you have extremely mature children, you should not give your child a physical credit card (at least not yet). If you are just starting the process of teaching children about credit, your kids could very well misuse a credit card, leaving you with a pile of debt, a higher utilization rate, and a lower credit score.
So clearly, you must protect your pocketbook and credit score, which is why I say you should not give your children a physical credit card. In fact, you might not even want your children to now that they have been added as authorized users yet. And be sure your children cannot access your financial records or account numbers. In doing so, you can begin building your child’s credit score without exposing yourself (or your children) to the dangers of an immature credit user.
Okay, with all those precautions out of the way, let me explain why I think this is a critical step of teaching children about credit.
Listing your children as authorized users comes with a host of positive outcomes:
1. You will set the stage for later steps of teaching children about credit. We will talk about this later, but briefly, once you start teaching children about credit, you might want to give your children access to a credit card so that they can make small, pre-approved purchases, like paying for a $20 dinner or a $10 movie.
2. Your children will begin developing a relationship with the credit card company. Eventually (when your children become adults), your child might want to apply for a credit card company of his or her own. If your child has been an authorized user for years, he or she will receive better terms, so long as your account has been in good standing.
3. If you use the right account, your children’s credit scores will rise. In short, you should choose a credit card that:
- Is and will remain in good standing. This means you have always paid it on time and you will always pay it on time!
- Has a low utilization rate.
One last thing about teaching children about credit by adding them as authorized users: If you are ever late on a payment, remove your children as authorizes users immediately. This will preserve their credit score. And be sure to join us next week for the next part of this series!