When Congress enacted the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 -- which made it illegal to issue a credit card to anyone under the age of 21 without a job or co-signer -- the assumption seemed to be that young adults are less capable of handling credit than their elders. But a recent study by researchers at the Federal Reserve Bank of Richmond and the University of Arizona suggests that assumption may need re-examining.
The study found that people under age 21 are actually better at managing their credit in some ways than older groups of borrowers. The study compared age groups using bank data from before and after the CARD Act and found that young adults under age 21 are substantially less likely to fall into a serious delinquency (such as 90 days past due or worse) than some older groups in the study. They are also the least likely of all age groups to default on a credit card.
Student credit card use data from Sallie Mae's 2012 How America Pays for College report also point to responsible credit card use among students: Forty-one percent of student card balances are less than $500 and another 33 percent of student credit cards have a zero balance.
Another important finding of the Federal Reserve study: Those who enter the credit card market earlier are less likely to default and more likely to have a mortgage earlier than those who enter the credit card market later, suggesting that early exposure to credit may actually be an asset for young borrowers.
But are all young adults ready for plastic?
Despite the encouraging data on youth and credit cards, teaching young people the basic of responsible credit remains important. Bad credit card habits can affect people throughout their lives and the effects can be costly, says John Ulzheimer, credit card industry expert for CreditSesame.com.
"No matter what age, the credit system will penalize anyone who manages their credit debt poorly with a bad credit report, bad credit score and higher interest rates," says Ulzheimer. "There's no magic epiphany at the age of 21 that a young adult is more ready to handle credit than before that."
While it may be sensible to embrace the credit card as a part of your adult child's financial life, parents should take their individual child's spending tendencies and financial competencies into account, warns Paul Nourigat, senior wealth strategist for U.S. Bank and author of "No Time To Wander: The Financial Compass for Young Americans."
If you're eager to instill sound credit habits in your offspring, here are some ways experts suggest you can guide, monitor and encourage good credit behavior in your young adult:
- Make them an authorized user on your credit card account. "If you add your child as an authorized user on your account, you can monitor usage, plan purchases and payments and discuss due dates, grace periods and how the finance charges are applied," says Ulzheimer. "It is like a credit card with training wheels." This way, kids can build good credit and a payment history under their own name, even though the card is attached to your account.
- Keep credit card limits low to start. Did you know you can ask any bank or credit issuer to lower your credit limit? Sometimes $500 is best for students, as it allows them to start out by planning small budget items, such as a clothing allowance. As they prove their responsibility, you can raise the limits and allow for larger purchases, such as airline tickets or a semester's worth of textbooks.
- Use technology. "As children of the Internet age, they know how to use online and smartphone applications to make their lives easier," says Ulzheimer. Consider encouraging your son or daughter to set up payment due date text alerts and apps to make payments quick and easy. You can also use this opportunity to explain how late fees affect a credit card balance and how chronic late payments harm credit scores.
- Teach them to check credit reports the right way. Ulzheimer, who lectures at the University of Georgia twice per year as part of a senior personal finance class, says that every time he asks students about how to check their credit reports, they collectively chant, "Freecreditreport.com," which is the most heavily advertised for-fee credit score monitoring company. "I always have to redirect them to annualcreditreport.com, the official free credit report site." Everyone is entitled to a free credit report once per year from each of the three credit bureaus, but you can actually check one bureau report every four months for free, so make sure your child knows that.
What if the kids make a mistake?
Andra Ghent, assistant professor of finance at the University of Arizona and co-author of the Federal Reserve study, says there still may be some protective benefits of the CARD Act for those under 21, given the scientific findings that the adolescent brain may not be fully developed until the age of 25. But kids develop at different rates, so if they are exhibiting responsible financial behavior, they may also be ready to learn to manage their credit sooner than age 21.
If your child proves an unworthy authorized user on your account by overspending on the card or missing payments, have them literally pay you back for the mistake. Then, you could try a prepaid debit card or preloaded gift card to restrict their spending, advises Ulzheimer.
"With your guidance, their credit card mistakes can be a lesson instead of a loss," says Nourigat.
Ulzheimer explains that he reaches college seniors successfully by appealing to their immediate post-graduation plans. "I explain how bad credit can cost kids all the things they want as soon as they graduate: A job, an apartment, a car loan and even a mortgage," he says.
That's a message that's likely to resonate with any adult, regardless of how young they are.