Credit Cards for Kids
When your kids are growing up they are becoming more independent in financial matters. So one day you realize that pocket money in form of cash is not the best way to teach your child to handle expenses. Secured credit cards and prepaid credit cards can be an answer. But how to choose what is better for your kid? Let’s compare prepaid and secured cards to find that out.
The main difference between these 2 types of credit cards is the same as between credit and debit cards. Secured card works similar to the regular credit card with the only difference that your balance is secured with a security deposit. Besides that, everything works the same way as with a credit card- you buy things, at the end of the month you receive a statement and you have about 25 days of grace period to pay off your balance. After the grace period you are charged an interest and need to pay monthly payments towards your balance. Secured credit cards often have higher APR then regular credit card because they are designed for people with bad credit history (or no history at all). In case you fail to pay the balance on time you are charged a late payment fee and bank can also take the money from your secure deposit to cover the expenses. Secured cards are very good at helping you to understand the process how credit cards work, manage your on-time payments, reading a statement. It works like a real credit card and it is a good step to getting a real one.
With prepaid credit card your kid can spend money only within the amount that was put on the account before – it works exactly like a debit card. There are special prepaid cards designed for kids and teenagers with “bill my parents” option. You can control the spending of your kid by looking through the monthly statement or you can do it online to see the most up-to-date info.
Both secured and prepaid credit cards charge you annual or monthly fee, so in terms of these costs they are pretty equal. The difference is visible if you are going to borrow money – you are not exposed to an APR with a prepaid card, but if you have a secured card you can get into credit and be charged an interest. Together with an APR the total cost of secured card for you can be higher. With a prepaid card you can consider adding an overdraft protection that can help your kid to pay for necessary even if the money on the account finished – that option is available for a fee (usually about $10-$15/day).
Explain a cash advance fees and terms to your kid for a secured card as well because it can be expensive. You should consider putting a credit limit for your kid’s card because unlimited opportunities can bring your child to unexpected spending.
The main drawback of prepaid card is that it does not help your kid to build a credit score and to learn how to manage a credit card. So he or she will not have any credit history no matter how long he was using a prepaid card and no skills of using a credit card will be gained. Secured cards in opposite are reporting credit events to the credit bureau and it will be a good basis for building a credit history. After a couple of years your child will be able to get a real credit card and with a credit history and all skills the kid will be in the financial comfort zone.
No matter if your child will have any credit history or not, when your kid will go to a college he/she will have an option to apply for a student credit card that is designed specifically for young people without any history. You can check student’s credit card’s options in our article.
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