This Sunday, Charlie Hill felt anxious to tell his daughter a new story. After exchanging pleasantries and ensuring everyone had a good week, he said, “So Katie, my financial advisor told me a Mama Moneybags story. I thought you’d enjoy it.” Charlie then recounted the tale he heard.
The Mama Moneybags Story
This woman, named ‘Corrinne,’ gave her daughter, ‘Darcy,’ a credit card for her 17th birthday. In reality, she just added the girl as a user on her account. Corrinne told the girl it was for gas and groceries, and anything she bought for herself, like fast food, dinners, clothes, or makeup, was on her. Because the mom paid off the credit card each month, by the time she turned 21, her credit score was over 750! When she was 23, Darcy had saved enough money to buy her first condo and she qualified for a competitive interest rate.
How an Authorized User Strategy Builds Teen Credit
“Since Keith is turning 17 this month, you might want to add him as a user on your account,” Katie’s dad suggested. “I don’t think Keith would abuse the privilege, as long as he knows the rules.” He then recalled how Corrinne checked the bill every month, and Darcy sent money to her mother through the bank app, Zelle. If she spent anything besides gas and food for the house (groceries) . Every month or two, Corrinne would get a money received notification from Zelle, even when she didn’t check the bill. After the first nine months, she trusted her daughter would send what she owed.
The Trust Test — Why Integrity Matters More Than the Bill
A few months went by, and Corrinne still hadn’t received any money, but she let it go. Wanting to test her daughter’s trustworthiness. Finally, she decided to confront her daughter when the Sephora catalogs arrived, and Corrinne logged into American Express and saw over $150 in charges at the beauty supply store during the past month, plus DoorDash and concert tickets. The mom called up her daughter and said, ‘Hey, honey, I see all these charges. Are you going to pay me back?”
‘I know. I’ll send you the money, the girl replied sheepishly.
‘How much do you owe me?’ Corrinne asked, not because she cared about the money, but because she cared about her daughter’s integrity.
Darcy sighed, ‘I don’t know; I’ll figure it out.’
Within the hour, Corrinne received a text message, ‘You’ve received $634 from Darcy.” $634 is a lot of money for a 19-year-old, especially as a full-time student. Let’s say she works 10 hours a week for $15 per hour. That’s $150 per week. Using the ADP calculator to take out taxes, that’s $138.52 take home. This girl knew she owed the money; it would have taken her at least 5 weeks to save that much. That is a lesson in short-term debt and credit cards.
The Real Cost of Paying Only the Minimum
Concerned that his grandson might get in over his head with debt, he said, “Keith needs to understand the interest rates associated with credit cards. If he does not pay off the balance by the end of the period, he’ll owe interest.” The example Charlie provided used the bankrate minimum payment calculator. Assuming he received an 18% interest-rate and used the card to tint his car windows and buy a new iPhone, which totaled $2,000 and only paid the minimum of $50 per month, by the time he fully pays off the balance, he will have paid $2,423.19 in interest over 182 months (6.8 years).
Before You Add Your Teen: 3 Questions to Ask
If you’re considering the same move with your own teen, read the questions below and think through before you authorize your credit card company to add a user.
- Is your card in good standing with a long history and low utilization? (If you don’t have good credit, you could damage theirs.)
- Does your credit card company report authorized user activity to the credit bureaus? (Not all do)
- What’s the plan if your child tests the system and breaks the rules?
These are the kinds of conversations the Hurlow Wealth Management Group has with clients planning their family’s financial future. If you’d like to talk through a strategy that fits your situation, set up a time to speak with a financial advisor. For over two decades, the Hurlow Wealth Management Group has been helping Midwest Millionaires and their families, find clarity, make decisions with confidence, and feel comfort in retirement. Call 866-333-4726 or Click Here to schedule a complementary consultation.
