Is Your Child Ready for a Credit Card?

Editor's note: This story has been updated in 2010.

Today I told my son Peter that he should consider applying for a credit card.

That might surprise readers of this column, who know I'm cautious about recommending credit for young people. But I think Peter, who's a junior in college and is turning 21, has earned the privilege.

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For the past two years he's been managing his summer earnings with two checking accounts (one at home and one at school) and a debit card, and I'm impressed with how well he's done:

• Peter has overdrawn his account only once, and as soon as he discovered his mistake he transferred money from home to his school account to cover the overdraft. He asked me if he'd still be hit with a $30 penalty. I told him that if he was, he should ask the bank to waive the fee. He was never charged.
• This year he's living in a house with eight guys, and he's been diligent about contacting the water company (his responsibility) and paying his share of the rent and other utilities.
• He recently told me that he keeps most of his money in savings and transfers money to checking only when he needs it. "If it were all in my checking account, I'd spend it too freely," he explained. "When I take it out of savings, that really hurts." (Peter thought of this strategy on his own, but I'd recommend it to any adult.)

It seems to me that when it comes to credit, parents often think more like adults than kids. That can lead them into a couple of pitfalls. Fixated on establishing a credit rating, they sometimes rush young people into credit too soon, before they have the maturity and experience -- not to mention the income -- to handle it.

At the other extreme, parents often assume that older kids know more about credit than they really do. Even college students need to be told the most basic facts. For example, they don't always realize that a credit card isn't cash; it's a loan for which they'll likely pay a double-digit interest rate.

Young people under the age of 21 can't get a credit card unless it's co-signed by someone 21 or older. The hope is that parents who co-sign will talk to their kids about annual fees, interest rates and the importance of paying their bill in full each month. But there's no guarantee that parents will have that conversation. And the new requirement could have unintended consequences.

For instance, parents might simply take the more convenient route of making their kids authorized users on their own cards. But that means young adults would be even less likely to learn about managing credit because Mom and Dad are still responsible for the bill.

I'd prefer to see kids follow Peter's cash-first route and then apply for credit on their own when they're 21. Right now Peter has three offers sitting on our kitchen counter.

If getting credit is a problem, however, young people can always apply for a secured card, which requires them to put up a deposit equal to their credit line but limits the trouble they can get into. After a year or so of paying their bills on time, they can upgrade to an unsecured card with more favorable terms. (You can search for credit-card offers at CardHub.com.)