My daughter is about to turn 18, and I'd like to give her a credit card by adding her as an authorized user on my account. We want her to have a card to use for emergencies when she goes to college in the fall, and she probably won't be able to get a card on her own because she doesn't have a job. The thing is, my husband and I have a balance of about $2,000 on that account. We manage to pay just the minimum (sometimes, if we're lucky, a little more than the minimum) each month. So, are we actually hurting her by adding her to an account that has debt that we're not paying down as quickly as we'd like? – Peg
Well, good for you wanting to help your daughter get a credit card! In addition to being extremely handy in emergencies, a credit card will also help your daughter begin to build a credit history early on, which can benefit her greatly down the road.
At the same time, the concerns you raise are important ones. Indeed, if the credit history associated with the credit card you would be adding her to isn't that great, it will hurt her credit history. And since she is just beginning to build a credit record, this would not be a great way for her to start out.
Without knowing all the details of your credit card, it's difficult to say whether the credit history associated with the card is unfavorable. It sounds like you are always paying the bills on time, so that's a plus. This, however, is offset by the fact that you are paying only the minimum each month.
Another key factor is how much of the credit limit on the card you're using. If the credit card is close to being maxed out, or even if the balance is over 30 percent of the credit limit, that is another drawback. Credit utilization, or the debt-to-credit-limit ratio, is a key factor in credit scores. Adding your daughter to a credit card with high credit utilization (the debt is close to the credit limit) will hurt rather than help her.
The other downside of adding your daughter as an authorized user to your credit card concerns you. Once your daughter has her credit card, she might just use it! If you're already struggling to pay the minimum payment on the balance you currently have, this could leave you in a difficult position if your daughter ends up using the card for emergency expenses that neither she nor you are able to pay off.
The good news is that you do have some great alternatives. Once your daughter is a college student, she might be able to qualify for a student credit card. College students are an attractive demographic for banks eager to establish a relationship with potential customers of the future. As a consequence, the application process for student credit cards takes into account that applicants won't have much of a credit history, if any.
As long as the student can document that he or she is associated with a specific college (and most card issuers will verify this), chances are high that they will be accepted by most issuers specializing in student cards. Getting a student credit card can be as simple as applying online, no co-signer required. Some student credit cards, such as the Journey Student Rewards Card from Capital One and the Citi Forward Card for College Students, are even set up to help cardholders build good credit. They offer tools for credit monitoring credit and perks (like interest rate reductions) for responsible use.
You may have heard the Credit CARD Act of 2009 limits credit card companies' ability to issue and market cards to young people. And, technically, the CARD Act does require applicants under 21 to prove they have sufficient income to get cards in their own name. Of course, card issuers don't disclose the specific criteria they use to determine whether a student has “sufficient income” to qualify for a credit card, so your daughter may or may not get approved. There's no harm in her applying — and certainly, if she were to get a part-time job with an income of her own, her chances of getting approved will improve considerably.
Since your daughter is not a student yet, she may have to wait to apply until she heads off to college in the fall. If you want to be sure your daughter has access to money for emergencies once she leaves home, consider getting her a low-cost prepaid card as well. Some prepaid cards specifically target students — check out the PASS Card from American Express, which comes without fees (other than $2 for ATM withdrawals) and offers access to financial literacy education tools through the Amex-sponsored JA Student Center. A prepaid card involves loading a certain amount of money onto the card with which to spend. There is no credit extended.
Between now and then, my advice is to get your daughter to start saving money to load that onto a prepaid card, so that she can draw on her own money for emergency expenses. This will protect you financially and give your daughter some good experience in earning and saving money. Establishing good savings habits might also help her avoid the temptation to use creditfor easy access to “money,” once she does get her own credit card.