Dubai: If as a parent you could give your almost adult child a credit card in their own name, who can then make purchases just like you would on your account, would you do it? Keep in mind that only you would responsible for paying the charges.
“While it can sound scary for parents thinking about giving their teen access to a credit card, there are ways to handle the situation so that your child gets the most from it without landing you in debt,” said Essam Kabeelali, an Abu Dhabi-based consumer credit advisor.
“Teenagers need to be educated about credit before they eventually leave home and get their own credit cards. While you could just hand them your credit card whenever they want to make a purchase, there are extra benefits to making them an ‘authorised user’ on your account.”
You being the primary cardholder has to add an ‘authorised’ user. This can be done by calling the credit card issuer or logging onto the online account.
Many issuers will issue a second card for the ‘authorised’ user, but it will generally be mailed to the primary cardholder, who can choose to give it to the ‘authorised’ user or not.
Learning every dirham spent must be paid back
It’s a given that by introducing teenagers to credit early on, they can gain an understanding of what it means to owe money and that what’s spent must be paid back. Additionally, they'll also learn about credit card interest this way, and how not paying balances means owing more over time.
“I’ve always felt that teenagers don’t really understand what credit is until they experience it firsthand,” said Blesson Babu, 54, father to two teenagers, a son aged 14 and a daughter aged 17. “This is why I have given my oldest ‘authorised’ access to my credit card, but I monitor her usage.
“But I needed to first establish that she would be personally responsible for paying the charges or interest that incurred with every purchase made, from her own allowance. If I paid for all her purchases, she’ll learn less about credit card use. I will give similar access to my son in a few years.”
But what if they go overboard in their spending? For example, your teen might use their ‘authorised user’ credit card to overspend on new clothes. When the bill arrives, however, if you have made it clear that they will have to pay for the charges, they'll be forced to pay the price of overspending.
“If your teen goes overboard when spending, but if cash was kept aside to pay the bill in full, the young adult can be proud of that accomplishment,” Kabeelali added. “This teaches them financial discipline in the process. If not, they'll learn what it means to carry a balance and pay interest.”
What to watch out for when giving a credit card to your teenage child
While adding a teen as an ‘authorised’ user to your credit card account is beneficial for them, that doesn't mean it's risk-free for you, being the primary cardholder. As the account owner, you'll be responsible for any charges your teenager accumulates.
“Whether or not your teenager makes efforts to repay your credit card balances or not, it is your financial health on the line when charges or interest balances accumulate,” explained UAE-based financial planner Andrea Barbara, who routinely coaches parents on money matters.
“One way to prevent this is to set a spending limit on the ‘authorised user’ card. With a spending cap in place, their card will be denied if they try to charge more than their limit allows. However, you will have to check if your card issuer allows you to have a spending limit for ‘authorised users’.”
What if you won't be able to keep track of your purchases and theirs?
An effective tactic that can keep things straight is to add your child as an ‘authorised user’ on a credit card you rarely use, suggested Barbara. “That way, their purchases won't become intermingled with yours and you can easily track what they spend and how much they owe.”
“You can also keep a running tab on what's going on with your card by creating alerts for every time your account is used. Whatever you do, let your kid know how much can be spent, and how repayment works. If they appear to be going overboard, take the card away from them.”
However, don’t risk both your credit records if you feel your teen needs to be more responsible in handling credit. In that case, Barbara advises getting them a prepaid debit card as a start. “Prepaid cards don't help them build credit, but they can't hurt anyone's credit record either,” she added.
Whether or not your teenager makes efforts to repay your credit card balances or not, it is your financial health on the line when charges or interest balances accumulate
Depending on your credit card issuer, you can add your child as an ‘authorised user’ on your account as long as they meet the issuer's requirements. Before doing so, you'll want to make sure your child has a good understanding of how credit and debt repayment work.
But what are the perks to doing so? Aside from developing good habits early by learning to anticipate bills and creating a budget that works with the amount of money they earn, whether it's through an allowance or a part-time job, there are other benefits as well.
“The most important reason to add your child as an ‘authorised user’ is to help them build a credit history. As an ‘authorised user’, the action on your credit card account will likely be reported to your teen's credit report,” noted Kabeelali.
“Assuming you use the card responsibly and keep the balance low, your teen will benefit from your discipline in handling credit, and over time, earn them a good credit score.”