Helping your children build their credit is an important step in getting them ready to head out into the world without you. Unfortunately, good financial skills are rarely taught in school so it’s the parent’s responsibility to teach these necessary skills at home.
It’s important that you show your children how to build a strong financial foundation, including a steady stream of income, a good bank account history, and a basic understanding of how credit works.
1. Get them a bank account
A checking or savings account is a great way to introduce financial responsibility to your child with relatively little risk. Having a lengthy financial history can also help when your child is ready to obtain their first credit card.
When starting out, consider opening a joint checking account for your teen. This way you can see what they’re spending and when so that you can discuss any spending issues they may be having. Help them avoid overdraft fees and declined charges due to insufficient funds. Keep an open dialogue through everything – make sure they understand their responsibilities, as well as any actions you take with the account. Encourage them to make regular transfers to a savings account.
2. Make sure they have an income source
Building credit means using credit, and no one should use credit if they can’t afford to repay their charges. Plus, if your child is under 21 (and at least 18), the law requires credit card issuers to verify a source of income. So it’s important that your child have a steady stream of income to pay their credit card balances.
This means your child needs a job. Helping them prepare to enter the workforce doesn’t have to be complicated. Just make effort to teach your children responsibility and the value of hard work. Give them chores and when they’re ready, help them with the job application process.
You’re teaching your child good financial practices so it’s important that they pay their own balances as soon as they’re able. They need to learn that credit isn’t free money and it does need to be repaid, and that the repayment will come at a higher price once interest is added.
3. Make sure they’re ready
Before helping your child get their first credit card, it’s important to make sure they’re ready for it. Have they been managing their money well? Do they need you to deposit money into their bank account in order to avoid overdraft fees? Is your child good with meeting deadlines and getting home by curfew? All of these things play a part in how prepared they are for the important financial responsibility of a credit card.
4. Teach them how it works
Before getting your child a credit card, make sure they understand how credit works. Teach them how to locate and review their credit report, and where to check their credit score. Teach them the importance of paying off debt as quickly as possible in order to avoid fees and improve their score. And talk to them about the importance of not overextending themselves with credit.
Money and credit can sometimes feel like a taboo subject, but the more open and honest you are about how these things work, the better prepared your children will be to manage credit with confidence and caution.
5. Get them a secured card
The law doesn’t allow anyone under the age of 18 to sign up for a credit card on their own. Once 18, your child is free to apply for any card they like (assuming they can meet the income requirements set for card holders between 18 and 21). And while it may be tempting to grab the best terms and the highest limits available, it might be a better idea to start out with a secured credit card instead.
A secured credit card is a safe way to establish credit without going into debt. The card company will require a security deposit that will be equal to the amount of credit available. For instance, a $300 deposit will give your child a $300 credit limit. The security deposit will be held in savings and only used if your child defaults on their account. Your child will use it just like any other credit card for purchases less than their available balance, and they will make monthly payments to pay off the balance.
Since you don’t need a long or exceptional credit history to obtain a secured card, it’s a great option for someone just starting out with credit, trying to build their credit history. And because you can’t outspend the deposit, the risk is minimized. Most secured cards also offer the opportunity to convert into a regular credit card after a certain period, presuming you’ve been making your payments on time.
What about making them an authorized user?
Another option you can potentially explore is to add your child as an authorized user on one of your credit cards. This may help build their credit history, but it’s not exactly “safe”, which is why you should exercise caution before going that route.
By making someone an authorized user on your credit card, they have the ability to make purchases with the card, which could be dangerous. It’s also not a guarantee that authorized user status will have a significant impact on someone’s credit score – or any impact at all, as not all creditors even report authorized users to the credit bureaus.
Start early and go slowly
Helping your children build their credit will help secure their financial future while they’re still at home under your supervision. If you make financial education a small, but routine part of your lives from a young age, by the time they’re old enough to start using credit your children will be more than ready.