5 Ways to Help Your Child Build Credit

As a parent, you want the best for your child. From the time you bring them home from the hospital till they graduate high school, you cheer them on in everything they do. Along with your support, you also provide your child with the guidance they need to thrive. But have your prepared them enough for the real world once they leave the nest?
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It’s essential that your child not only have necessary life skills, but personal finance skills as well. One of these skills is building good credit. If your children can build their credit while attending college, they will be further ahead of their peers post-graduation. Being established with the credit bureau can open up opportunities and options to help your child succeed.

If you take action now, you can help ensure your child is ready for whatever the next step may be in their life.

Establish good money habits

Just like anything else in life, the foundation of building credit relies on good money habits. It’s never too early to start. Explain to your child basic money concepts such as wants and needs, saving for the future, and the importance of giving to those in need. It is human nature to want to spend money, but if a child learns early on about spending wisely, these money habits will transfer over to when they are older.

Opening a savings and checking account for your child will teach them how banking works, such as making withdrawals and deposits. Keeping their money in a safe and secure location will also limit immediate access to help learn delayed gratification. Saving money in a piggy bank is not the same as keeping their funds in a financial institution.

When your child is a teen, suggest getting a job that works around their school schedule. Working a part-time job after school helps instill a work ethic for life—before, during, and after college. It also teaches your child to value their dollar by working for it. When you appreciate your money, you are less likely to rack up debt by reckless spending.

All of these money habits will add up over time. When I was seventeen, I started working at an after-school program. Working hard for my money made me realize how important it was not to spend mindlessly. Instead of hanging out at the mall, I opened a checking account and started saving for a car. This would not have been an option for me if my parents hadn’t established good money habits from the beginning.

Explain credit basics

Once your child has learned the personal finance concepts listed above, explain to them the basics of credit use, especially credit cards. This may be the fastest and safest way to build credit. Some of the basics you should cover are:

Credit card limit and utilization rate

All credit cards have a limit, and it is important to explain this to your child to save them from a future embarrassment of declined charges. Since credit cards have different spending limits, it’s vital that your child knows this so they can practice responsible card usage. This would also be the time to explain about credit utilization and how maxing out all available lines of credit out can affect their credit score.

APR and fees

Annual Percentage Rate, or “interest rate” as it’s commonly referred to, can be tricky and add up very quickly. Along with an APR, a line of credit could also have fees. By explaining to your child how interest and fees work, it will help stop them from being taken advantage of when they open a new account. Many creditors count on you only making the minimum payments to fulfill the terms of the loan so that they can collect absurd amounts of interest.

How payments work

When I was younger, I made the mistake of letting an auto loan become delinquent, and it showed up on my credit report. I didn’t understand how monthly payments worked. Not only was I paying whenever I wanted, sometimes I wasn’t even paying the minimum amount due. Teach your child the importance of paying on time, every time, so lines of credit do not go into default. Explaining how late fees work will also help them stay organized.

Different types of credit

Everywhere you go, someone is offering a credit card to help you save on whatever they are selling. You also see advertisements for new cars and other significant purchases that encourage you to take out a loan. It’s good to explain the different types of credit, such as credit cards and loans used for automobiles, mortgages and even their education. You can also explain any benefits a line of credit may have while also explaining pitfalls. For instance, while a credit card offered in a store may give exclusive discounts, it would be wiser for them to hold out for better offers, such as a credit card with points. By thinking long-term, you can help them avoid taking on more debt than they need to.

Let them be an authorized user on your credit card

Many times it’s hard to let go of control as a parent, especially in regard to your child’s wellbeing. You may feel they’ll make a mistake before they even had a chance. You also know the importance of a good credit score and how long it will take to fix once it goes awry. An option that may appease both of you is letting your child be an authorized user on your credit card account.

By allowing your child to be an authorized user, you are helping them build their credit. So every on-time payment will help their score be established positively. This also gives you the opportunity to monitor their finances if they are still living with you or if you are helping them through school.

Due to the Credit Card Act of 2009, it is hard for your child to get a credit card under the age of 21 without a cosigner. Adding your child as an authorized user allows you to help them establish their score without taking on any additional credit in your name. You are also able to remove them from your account if they break your trust or merely prove not to be ready for the responsibility.

Encourage them to apply for a credit card in their name

If your child has already established some credit or has some substantial income, it may be a wise idea to have them apply for a credit card on their own. A credit card is easier to manage than a loan and can be paid off more quickly. This will also help them go at a slower pace that they can maintain.

By having a credit card in their name, they can establish their credit faster than being an authorized user on your account since it will be reported to the credit bureau differently. A credit card in their name also means your child has more skin in the game. Since they will be the sole party responsible, it will help ensure they make their monthly payments and keep their spending in check.

Encourage having them research options with different banks. Also take the time to explain the difference between secured credit cards vs. unsecured. It may be harder for them to apply for an unsecured credit card due to income limitations, but preferable over secured credit cards.

Allow them to learn from your mistakes

None of us are perfect in life. At some point, you made financial mistakes. All of us have. So let your child learn from you, so they don’t have to experience it firsthand.

When I was younger, I saw my father struggle with bankruptcy. He racked up credit card debt and a mortgage, yet lacked the financial responsibility to pay it off. My father didn’t hide this like he could have, and instead used it as a learning tool for me. By sharing his story, I am now careful not to carry a lot of credit card debt and always pay more than the minimum. I also work hard to ensure I am living within my means so I can be comfortable should an emergency arise.

You don’t have to file for bankruptcy or have a significant financial setback to make a point for your child. By having regular money conversations, you can ensure it’s not a taboo subject and share experiences. Perhaps you misplaced a bill, and it accidentally went to collection. Or maybe you paid your rent late once and got hit with a late fee. By sharing our experiences, we are not only letting people know we care about them, but we are also taking a moment to humble ourselves. Your kids will thank you for it.

The bottom line

Helping your child establish credit doesn’t have to be scary. You can help your child write their money script positively so they can start off on the right foot as an adult.

By helping them establish good money habits and learning the value of a dollar, neither of you will be scared when it’s time for them to start practicing personal finance as a young adult. Knowledge of credit and types of usage, along with what it entails, will allow them to make the best choices for themselves and their future. And after all, as a parent, that’s what you want.

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