This article written by Lazetta Rainey Braxton, MBA, CFP® originally appeared in The Wall Street Journal's The Experts Blog.
On our daughter’s 14th birthday, we took her to the bank to do what many parents do--open up her first checking and debit-card account with the birthday money she received from her grandparents. But we took it a step further and also handed her a credit card embossed with her name as an authorized user on our account.
Are you gasping at the idea of giving a credit card to a 14-year-old? Our daughter was. As parents, however, we were excited about giving her the gift of financial responsibility.
The responsibility of debt overwhelms even the best of parents; bringing children into the credit equation adds an additional degree of complexity and possibly headache. In fact, many parents don’t extend their credit to their children until they are headed off to college, while others expect their children to secure credit on their own merit in college. And there’s no shortage of credit-cards offers for students in college.
The problem is that for people new to credit (and even those not so new), it’s easy to feel the euphoria of swiping a card for new purchases while simultaneously feeling numb to the ballooning balance. And finding the strength and resolve to manage debt can take years, decades, or even a lifetime. So wouldn’t it be safer to have children learn and practice good credit habits under adult supervision rather than finding out the hard way with no support?
While we recognize that both debit cards and credit cards allow for cashless transactions (the desired method for Generation Z), credit cards provide better protection from fraudulent activities. So if our daughter’s credit card is lost or stolen, we’re covered. Also, the economic perks we received from consolidating transactions with one credit account (points and miles) offsets the annual cost of the card. Our daughter continues to have use of her debit card if she desires to use it.
More importantly, we see the credit card as an extension of our daughter’s financial-management habits. Starting at age 12 (before opening her own bank account), we gathered together monthly for a “money meeting” to tally allowances, financial gifts and money received for small tasks. She saved 10% (parents deposited the money in her custodial account), donated 10% (she completed her own church envelope), and divided the 80% between her short-term spending and long-term spending (she held the cash).
Now, she uses her bank account and credit card to manage her spending. We transfer to her bank account the portion of the household budget that pertains to her expenses, which include personal care and clothing. She is responsible for managing her budget and paying her portion of the credit-card bill via bank transfer. While she doesn’t have a specific credit line, she does have a spending limit that we monitor. She can only charge an amount that she can pay in full each month, based on her household allotment and her personal funds.
While the credit card gives our daughter some financial independence, it also gives us an easy way to monitor her potential abuse of credit by overspending. I saw signs early in our daughter’s life that she prefers nice things. Confession: My husband and I have raised her in a middle-class life, while we come from modest financial backgrounds. But since I did the swiping of the credit card, she only experienced the enjoyment of the purchase and not the responsibility of paying for it. She had no clue that she was susceptible to overspending based on her taste and our family’s income.
Finally, our daughter doesn’t have to be afraid of making financial mistakes, which is, for us, the most important reason to give her a credit card. By tying money management and responsible credit-card use at the young age of 14, our daughter will have our guidance for four years prior to being an independent college student when credit becomes easily available. If she overcharges, we will serve as her “overdraft protection” and assist her with getting back and staying on track.
Although she was initially afraid to accept the credit card, it boosts her confidence as a money earner and money manager. Our daughter uses the credit card, mindful that she has received a gift of a (financial) lifetime.