5 Steps to Help Your Children Build Good Credit

7 12 2016

As if negotiating young adulthood weren’t hard enough – with the perils of dating, starting a career and figuring out how to keep your whites from turning pink in the washer – young people leaving the nest also need good credit. Without it, they face obstacles getting a car loan, a credit card or an apartment, and could end up paying higher interest rates for loans they do get. To build credit, young people need to show they can use credit responsibly, but how can they do that if no one will give them credit?

Fortunately, there are ways you can make it easier for your children. Start by educating them from an early age and making sure your own credit habits provide a good example. Follow these other five steps, and by the time they’re flying solo, your kids should be well on their way to a solid credit score.

 

1. Help them open savings and checking accounts. A savings account is a basic building block for helping children understand the financial world. Help them open an account when they’re young, and then let them deposit allowances, birthday money and cash from odd jobs. Encourage them to save up for something they want to buy to introduce the concept of delayed gratification. As the account grows, your child will also see first-hand how compound interest works.

When your children hit their early teens, help them open a checking account. Show them how it works and teach them about penalties if they overdraw or bounce checks. Once they know the basics, ease them into a debit card. This will give them some spending independence, but will limit their spending to their checking account balance.

2. Have your teen get a job. A solid work ethic goes a long way toward making your child into a responsible adult. Getting a part-time job in high school helps teach children the value of money, the thrill of seeing savings grow and the disappointment of watching it disappear if they make bad decisions. All of this is a precursor to understanding credit. Having income also helps in later years, when they’re ready to apply for their own credit cards.

3. Add them as authorized users on your credit card. Assuming your own credit habits are sound, and your card will allow it, this is a good way to help your children establish their own credit record. As authorized users, your teens will usually get a card in their names, tied to your account. In many cases, the account goes on both your credit record and your kid’s record.

While the authorized user can make purchases on the account, only the primary cardholder is liable for making payments. To help your child’s record as much as possible, together you should use only a small portion of the credit line and pay the bill every month on time.

If you think your teens are not yet mature enough to handle a credit card, you may want to add them as authorized users without giving them access to the account. Their credit will grow as you use and pay off the card every month, but there’s no chance they’ll ring up charges they can’t pay for.

Once you think your children are ready to handle credit cards, set ground rules for what they can charge and how payments will be made. Monitor their charges, and if your children turn out to be irresponsible with spending or payments, you can remove them from your account.

There are a couple of ways to smooth this process. One is to let your child be the only one who uses the card. That way, you don’t have to sort through who made what charges.

4. Have your college-going child apply for a student credit card. Once your children reach their late teens, if they’ve established good financial habits, they may be ready to apply for their first credit card. College students may be able to qualify for student credit cards, which usually have lower credit limits and higher interest rates than general credit cards carry.

Still, by law, applicants under age 21 will have to show that they have enough income to support a credit line. A part-time job is usually good enough proof. The other way for them to qualify is for you or someone else to co-sign for them. But you get less control as a co-signer than when you add your child as an authorized user. For instance, you may not receive notice of late payments, which can harm your credit score. For that reason, it’s better for your children to get their first solo card on their own.

5. Help them apply for a secured card. If a student card is not an option, an 18-year-old can apply for a secured card. A secured credit card requires cardholders to put down a deposit of a few hundred dollars, which is usually equal to the credit limit they’ll be given. Because there’s little risk to the bank in these situations, most people can get approved for a secured card.

The downside to secured cards is that many of them charge hefty fees. But if your child uses the card regularly for small charges and pays off the balance every month, in six months to a year, your kid should qualify for an unsecured card.