While many of us had to learn financial literacy from scratch in adulthood (one recent survey found that 31% of families have no money conversations with their kids at all), others come from families that overdo it with the opposite approach — discussing 401(k)s at every dinner table and setting up joint credit cards before one even reaches the teen years.
The latter practice of adding an underage child as an authorized user to one’s credit card is a common way for some families to not just give children spending money but also do what they think will start building credit early — a well intentioned move that, according to financial experts, is actually a mistake.
This Common Practice Doesn’t Actually Help Teens Build Credit
In an interview with CNBC, Austin Capital Bank CEO and former Consumer Financial Protection Community Bank Advisory Council member Erik Beguin said that such “piggy-backing” off another account does not actually reflect consistent payments in one’s credit history — for that, the child would need to be made a “co-signer” or have a secured credit card in one’s name.
While the authorized user method can be a good way to start teaching teens about the ins and outs of credit early, many families mistakenly believe that it will start building credit.
“What’s really important is the conversation about how to manage your credit and responsible use of debt,” Beguin told the news outlet.
As most banks will only give secured credit cards and co-signer access to those in their late teens, a few months of early credit history is unlikely to make a huge difference in one’s financial well-being. According to CreditCards.com Senior Industry Analyst Ted Rossman, it is far more important to have financial literacy and have a strong understanding of how to work with credit.
Financial Literacy And ‘A Stepping Stone To Establish Credit’
“It’s important to use this as a stepping stone to establish credit in your own name,” Rossman said.
Understanding of everything from a FICO score to investing basics is more of a “teach to fish” strategy that can set one’s offspring up for a good financial future. A survey done by Junior Achievement/Fannie Mae in the summer of 2022 found that only 45% of polled teens aged 13 to 17 could correctly explain how a mortgage worked, while 76% “lacked a clear understanding of credit scores.”
Most, however, also made vague statements such as “it’s good to start building credit early” or “owning a home will help one have a good life” without fully understanding how they can get into debt by doing this incorrectly.
This education, experts say, needs to be done both at home and school. Without a strong financial understanding themselves, many parents can inadvertently give kids bad advice or sign them up for things, such as being an authorized user, that do not actually achieve what they hope.
“The financial illiteracy among [young people] is worrying, and we need to come up with clear standards and devise how we can teach financial education to establish positive behavior,” Bill Ryze, a chartered financial consultant in Tennessee, told TheStreet in August 2022. “There is a need to train educators to deliver financial education effectively.”