Parents are turning to credit cards for their kids in record numbers all across the nation. For good reason too, they’re safer than cash and they allow parents to easily track their kids spending habits. That being said, the question is, what type of card you should use and what will it cost to use it. The three varieties are debit and prepaid cards, secured credit cards and student credit cards. Each of these cards have the visa ® and Mastercard insignia and are accepted most places regular credit cards are accepted.
Debit/Prepaid cards – The difference between these two cards is negligible, one pulls from a bank account and the other is preloaded like a phone card. These cards are largely used to fund children’s allowances, or college students that still receive money from home. If the children are under-age parents can have the cards issued into their names and simply have the child added as a user of the card.
These cards are also popular for undocumented workers as an alternative to the high cost of check cashing operations. For this reason, the fees associated with these cards range from barely acceptable to highway robbery. Most of the cards will charge a per-transaction fee or a flat monthly fee for using the card. What you need to pay particular attention to is the annual fees and the reloading fees. Many of these cards have neither, however, since these cards cater to each side of the economic spectrum you need to do your homework before getting one.
Secured Credit Cards – These cards differ from debit cards and prepaid cards in one area, they build credit by reporting to the credit bureaus. The only reason to use this card is to help your child build credit. This is because they require you to pay your credit limit up front, and then they charge you interest to use it. No really, think about it, you give the bank $500, and when you need to “borrow” some of your money, they charge you interest. Kind of sounds silly when you say it out loud, doesn’t it?
However, these cards can be a safe alternative for you to build credit for your child, if they are used wisely. The trick is, to get the become a credit card processor card and never use it. Credit cards only have to be used once to begin reporting to the bureau. After that, you can tear the card up and never use it again. Most people mistakenly believe that the card has to be used regularly to build credit, this simply isn’t true. Credit bureaus only report, how long you have had the card, what your limit is and if you have been late on your payments.
Student Credit Cards – These cards are, for the most part, used by college students without the parent’s involvement. These cards usually give small initial limits and steady increases as the student shows fiscal responsibility. These cards aren’t designed for people with bad credit, but specifically for students without any credit at all. The credit card issuers will usually require that the student provide school transcripts, a diploma or a student id before approving the card.
This is an ideal way for student to build their credit or ruin their credit early in life. Many student loans have been turned down due to a poor payment history on student credit cards. Some student credit cards will require co-signers from the parents to ensure that the account is paid as agreed. Make no mistake though, if you cosign for your child, and he or she skips a payment or two, your credit will suffer right along with theirs.
A good alternative for parents to get credit cards for kids while allowing their child to build credit is to use a combination of the secured card and a prepaid card. As a parent, you can simply fund a secured credit card and stash it away, then use a low cost universal prepaid card to fund their expenses. This way, when the child leaves the nest, he or she has a good credit reference that could possibly get you ‘off the hook” from having to co-sign for that first car.