We all want the best for our children and that includes helping them to learn about credit and the benefits of having a good credit score. As parents we need to set a foundation for them financially. Teaching your teen good money management, rather than try to build their credit history for them, will be more beneficial in the long run. And credit is for the long haul, it takes time to build credit, and takes even longer to fix credit. So let’s teach them from the start how important it is and how destructive it can be if they go about using credit in the wrong way.
My eldest son is currently a senior at high school and has questioned me and commented numerous times over the last six months about why they are not being taught anything about finances, credit or taxes as a core subject in school. We are talking about real life issues and these are teens that are expected to enter into these real life scenarios in the very near future.
So here’s are some pointers.
Help your teen to manage a checking or savings account. Establishing a good banking record will help them build a much stronger financial foundation. Being able to access their information from a mobile app will give them a more in-depth understanding about their spending habits and ability to budget. I have accounts set up for all of my children and am currently putting $10 per week in each child’s account. My teen has had to manage and budget with only $10 per week (not including transport etc). I played around with different amounts and found that this was the only amount that didn’t encourage him to purchase anything online, game based.
Encourage your teen to get a job. This will instill a work ethic and open their world up and build self-esteem. Once they have a job history they can apply for a credit card. Ideally, your teen should build credit in their name alone. The law does require credit card issuers to check income for applicants under age 21. Plus, they are going to require a steady source of income to pay off their credit card balance. My son took his time getting his first job but is now working at Chic-Fil-A, a perfect first job for a teen while still at school. Now that he has an income, he can spend it on whatever he likes. I really can’t say much about how he is spending, but only encourage him to spend it wisely.
However, getting approved for a credit card without a credit history can be a difficult feat. Obviously, it is best to speak to the bank that they already bank with and have a history with.
Help your child understand credit cards and how credit works. Make sure they know the facts about how credit cards work and how good credit is built. Especially make sure your child understands that a credit card balance has to be repaid, and it works better if they pay it in full every month. If not it will hurt their credit if the balance is over 30% of the limit.
A retail credit card is another credit card option that your teen can explore if they have issues with a bank credit card. They are known to approve applicants with little or no credit history. However, if they don’t pay the balance monthly they will learn quickly about high finance charges.
A secured credit card works the same as a regular credit card, except it requires your teen to place a deposit against the selected credit limit. Some secured credit cards allow a minimum deposit of $200 for a $200 credit limit for example. After 6-12 months of proving you can handle your credit card responsibly, they will give back your security deposit.
Added as an Authorized User. One of the easiest ways to jumpstart your child’s credit history is by adding your teen as an authorized user on one of your credit card accounts. An authorized user gets all the benefits of using the credit card and even has the credit history of that account added on their credit report. In this scenario, the authorized user doesn’t have the legal responsibility of your debt. This option really does boost their credit, but do you want them to have access to spending your money? That doesn’t teach them to be responsible for their own financial situation.
I would advise against getting a joint credit card with them, as you can lose control of the account and it can negatively affect your own credit.
Education is the key. Give them access to a free online site such as Credit Karma where they can see, learn and manage their own credit.
Have your teen understand that their credit card issuer will report their credit card history to the credit bureaus every month. This credit reporting is how a credit history is built. Then the credit scoring companies use this reported information to generate a credit score. Using a credit card the right way will make or break your teen’s credit score. Their payment history is the most important credit score factor. So never pay late.
Applying for too many credit cards in a short period of time is also detrimental to their credit score. Credit card and loan applications also known as hard inquiry show up on their credit reports for 2 years.