Credit card 101: Options for first-time users

One of the best ways to teach a child about money is to let them experience using it. Now when it comes to teaching them about credit, I’m sure for many parents it makes them a little antsy. Thankfully, there are different credit card options suited for new users.

Prepaid Visa or Mastercard

These can be purchased in various convenience or big-box stores. It’s pretty much a debit card with a Visa or Mastercard logo on it. Your “credit limit” is based on how much money you deposit onto it and how you use it doesn’t influence your credit score. There is no interest or minimum payments involved. The only difference between this and a debit card is that it allows you to shop anywhere where a Visa or Mastercard is accepted, except when it comes to hotels or car rentals.

Secured credit cards

This is a common suggestion for new immigrants who are looking to quickly establish their credit score or anyone who’s had credit problems in the past. It’s easy to mistake this with a prepaid credit card because sometimes they’re also called that. They work very similarly, your “credit limit” is based on how much money you deposit onto the card to serve as collateral in case you default, but the main difference is that this card is given by a financial institution such as your bank and how you use the card affects your credit score. Some cards do offer you credit, while others work like a debit card. The card lets you shop anywhere a Visa or Mastercard is accepted. This is a good option for any parent still worried about how their child will handle their first credit card, says Ruth Kewin, president and CEO of four quarter$, a business that focuses on teaching children about personal finance.

Authorized user on a credit card

I started as an authorized user myself a few years ago and that’s because I needed to rent a car for my then job in Grande Prairie, Alberta. This is in every way a normal credit card, there’s interest on balances, a credit limit and your purchase history affects your credit score. Parents need to give their approval for children to become authorized users on their credit card. One key difference is that if the authorized user racks up a hefty debt load, then it’s ultimately the primary cardholder’s responsibility to pay it off. Kewin stresses that parents need to know their credit card details before authorizing the child to use their card. Michele Cacdac-Jones, senior director of communications and public relations with Equifax, suggests parents let their children be authorized users so they can keep track of the child’s spending.

Co-signed user on a credit card

This is like a normal credit card, but in this case both the co-signer and the cardholder are equally responsible for any debt incurred. If one person defaults on their debt, the other person will be expected to pay it back and it will affect both their credit scores. If you think your child is responsible enough and you trust them to handle their own money and credit then maybe give them a co-signed card, but just be aware of the possible consequences, Kewin adds.

When teaching children about credit Kewin stresses that people shouldn’t be afraid of those pieces of plastic. “I think there’s also this fear factor that people have,” she says. “It’s to learn as in anything, learning is a graduated step-by-step process and it’s OK to make mistakes. What we want our children and young people to do is to make mistakes where the cost of that mistake is not so high.”