From allowances to credit cards: A parent's guide to supplementary cards for teens
If you’ve had a credit card for a while, you know that it’s a very useful financial tool. Many consider it essential, and if used responsibly, it doesn’t only help you extend your purchasing power, it also gives you access — through rewards points, deals, and rebates — to a world of perks and privileges that fit your lifestyle and needs. Now, wouldn’t you want to share the same benefits through a supplementary credit card for your teens?
You would, right? On one hand, it’s a great opportunity for them to learn about money management first-hand and it could help set them up for success. However, on the other hand, it’s a huge responsibility and it comes with great risks. To help you mull it over, here’s a guide on the whats and whys, with a rundown of the benefits and risks, plus some tips on how to help manage their supplementary card if you decide to go for it.
First, the basics:
What is a supplementary credit card?
A supplementary credit card, also known as an "add-on" or "authorized user" card, is an additional credit card linked to your primary credit card account. It allows your child (the supplementary cardholder) to make purchases using your credit card's line of credit.
How does it differ from a regular credit card?
A regular credit card is issued in the cardholder's name, and they are solely responsible for managing the account, making payments, and building their credit history. In contrast, a supplementary credit card is an extension of the primary cardholder's account, with the primary cardholder maintaining control over its use and payments.
Moreover, the credit limit for the supplementary card, set by the principal cardholder, is part of the principal card's total credit limit, preventing supplementary users from accessing the full credit limit of the principal card.
Why is it a good idea?
They learn about financial responsibility firsthand.
Supplementary credit cards can be valuable tools for teaching your child about responsible money management. Using a credit card can help develop their budgeting and decision-making skills.
They get access to emergency funds.
A supplementary card can provide your child with access to funds in emergencies or when they are away from home, offering peace of mind for both you and your child.
It teaches them the concept of maintaining good credit.
They can practice the idea of spending and paying, and how important it is to stay within their means. If they spend more, then they’ll need to pay for it with their savings.
You can monitor their spending.
Having a supplementary card allows you to track your child's expenses easily, enabling you to identify and address any issues or concerns promptly.
What are the risks?
It might feel like “free money,” especially if they know you’ll cover for them.
One of the primary concerns is that your child may overspend or accumulate debt on the supplementary card, potentially leading to financial problems. You could also end up teaching them the opposite of independence when they know you’ll pay for their debts anyway.
It’s going to affect your credit score.
Your child's actions with the supplementary card can affect your credit score. Late payments or high balances could harm your credit and risk denials for loans and bigger credit you’ll need in the future.
So before you hand the supplementary card to them, it's important to have a conversation on what you will pay and what they need to pay themselves or pay you back for. More on this later.
Is your kid ready?
Decide when to do it.
Consider your child's age and level of maturity. Are they responsible enough to manage a credit card without overspending? A good rule of thumb is to give them the card when they go off to college, but you can wait it out for longer if you feel they need to meet more “eligibility requirements” (see below).
Meeting your “eligibility requirements”.
The most important deciding factor perhaps is whether your kid has been able to demonstrate financial responsibility with allowances and savings. How’s their attitude towards money and spending? It could be a great idea to sit down and discuss with them the requirements that they must meet before you get them a supplementary card.
Setting the limits.
Define what it’s for and identify acceptable use.
Will the card be for emergencies only? Or will it be a part of their monthly spending allowance for expenses like groceries, school supplies? Set the ground rules by specifying the types of expenses that are acceptable and appropriate for the supplementary card. This will help prevent misuse, and teach them the discipline needed to manage a credit card.
Establish a monthly spending limit.
Make sure that they understand that they need to stick to a monthly spending limit, much like their allowance. You’ll need to make exemptions for certain situations like emergencies but it’s important that they understand that the baseline is that they follow this limit.
Establish consequences for misuse.
There are emergencies and there are “emergencies.” To further emphasize the importance of financial responsibility and to prevent building bad habits, establish a system for them to “repay” their bills if they go over their limit. You can, for example, take the excess out of the next month’s limit, make them pay for it from their allowance, or completely revoke their card privileges for a period of time.
Review the statements together regularly.
Make it a habit to review the credit card statements together. Discuss any questionable charges and teach your child how to reconcile their expenses.
A credit card is a valuable instrument, and it can also be an effective tool to help your kid learn about financial responsibility. By setting clear rules, fostering open communication, and providing ongoing guidance, you can empower them to make informed financial decisions and develop a strong foundation for financial success. When it’s time for them to earn their own income and get their own credit card, they’ll know enough about managing it well and they’ll be able to set themselves up for good credit.
When you feel like they’re ready, apply for a supplementary card here. Learn more about how you and your family can lay a good foundation for your financial future:
