As spring turns into summer, many students are anticipating graduating and moving on to the next stage of their lives. At this time, parents may be considering giving their children a credit card as a graduation gift, but is this a good idea?
Of course, friends and family cannot actually open an account in a student’s name — only a card issuer can do so after the student submits an application and is approved. Nevertheless, parents can make their children authorized users under their own account. As the primary account holders, parents are authorizing the student to use the card to make any purchase, and the parents will always be responsible for repayment. As authorized cardholders, students can use the card to make purchases at their discretion, but they will be unable to report a card as lost or stolen, dispute charges or make any other changes to the account.
There are several good reasons why parents may wish to make their adult children authorized cardholders:
Convenience. Students can easily charge books, meals and other living expenses with a credit card rather than have their parents write and mail checks.
Security. Stolen checks can be used fraudulently and it can be time consuming to resolve. And when cash is stolen, it is gone forever. In contrast, federal laws protect credit card users from unauthorized charges to their account, and card issuers immediately issue a temporary statement credit when a fraudulent charge is reported. Once the claim is documented, the credit becomes permanent.
Safety. Many parents feel that students living away from home for the first time need access to emergency funds. Should their car break down, or other travel plans become disrupted, a credit card can be an invaluable means to cover unexpected expenses in a pinch.
Building financial skills. Being an authorized user on a parent’s account is like having a credit card with training wheels. Parents can monitor their children’s spending in order to make sure that the privilege is not abused. Parents can even have their children reimburse them out of their personal accounts for certain charges, just as if they had to pay the bill. For example, parents might agree to pay for books and academic fees, but have their children reimburse them for entertainment and leisure travel expenses.
Building credit history. Young adults face the challenge of building a credit history from scratch while it is hard to open new accounts in their own name. By making a child an authorized user of their parent’s account, students can be on their way toward good credit so long as the parent’s account also has a history of on-time payments and carries a low level of debt, relative to the credit limit of the card.
Drawbacks of Giving a Student a Credit Card
For all of the benefits of giving a student access to a credit card, there are several potential issues that must be taken into consideration.
Overspending. Parents may fear that their child will treat a credit card as a license to spend “free” money. To address this concern, parents should closely monitor the account online, and let their child know that they will be tracking their spending. Fortunately, many card issuers allow customers to set alerts on their accounts whenever a certain amount is spent.
Costs. The vast majority of credit cards offer free additional cards to authorized users, but not every card does. For instance, the American Express Platinum card charges a $175 annual fee for each additional cardholder.
Hurting credit histories. Just as a strong credit history will help the credit score of an authorized cardholder, parents who are having trouble with their credit can hurt their child’s credit score by making him or her an authorized user on an account that has a history of late payments or carries a high balance in relation to the card’s credit limit.
If you’re thinking of making your child an authorized user on your credit card in order to help them build credit, it’s important to make sure that account is in good standing beforehand. You can do that by checking your credit report and making sure its good payment history and low level of debt have been reported accurately. Then, you can get an overall view of your credit by checking your credit scores — which you can do for free using tools on Credit.com. This is also an excellent opportunity to introduce your child to their credit, and get them in the habit of checking their credit reports and credit scores regularly.
Image: Digital Vision.