9 Tips to Help Your Child Build Credit
Many years ago, your child was just a baby who has not a single worry in the world. As the years pass by, your child gets older and older and it would be just a couple of years before they leaves the nest for the real world. By this time, your desire as a parent is that your child is equipped enough to face the mounting responsibilities, especially when it comes to their finances.
Like most people say, “teach them young,” and you want to do the same when it comes to your child’s financial management. When it’s time for them to live on their own, you want to be assured that they are using money wisely, paying their bills on time and saving for the future. You can’t do it for them since that will only create bad habits, but you can instill good values and strategies that will help your child build credit.
The Importance of Good Credit
You might wonder, “why not wait till they’re old enough to figure out how credit works on their own?” Well, you’re a parent and you want only the best for your child. However, you can only do so much in helping your child manage his finances as he turns into an adult. Teaching your child early about the importance of credit will prepare him to better opportunities in life.
Good credit is important in many aspects of adult life. You need good credit to apply for a new credit card or take out a personal loan. Additionally, good credit helps you get the best deals on a mortgage, auto loans, and insurance premiums. Some employers also check out a person’s credit to determine his eligibility for a job or rental property.
Good credit and proper financial management go hand in hand. It is very likely that a person with good credit manages his finances responsibly. Meanwhile, a person with poor credit may have several bad financial decisions that put his credit standing into jeopardy.
The thing is, you want to lay the best foundations for your child so he realizes early on how important it is to handle money carefully and consequently, establish healthy credit for him. Fortunately, you can start helping him good credit at an early age. Of course, you need to remember that these are just foundation and your child needs to do his fair share of building good credit in his name.
Here are the most important steps to help your child establish and maintain good credit.
STEPS TO HELPING YOUR CHILD BUILD CREDIT
1. Teach Them How to Properly Manage Money
Even before your child gets his hand on his first credit card, it is important to instill the value of money early on. As adults, we’ve had our entire lives before us learning how money works while the kids are only about to. So, give them a good head start by teaching them to manage money properly.
For younger kids, you can give them money to every chore they accomplish. Urge them to save that money for something they like, whether it’s a new toy or ticket to the zoo. Allow them to decide how to spend their money and let them make mistakes. It would be soon enough before they realize that a single trip to the toy store would cost them a whole month of savings. The sting of his own mistake can hurt so much that he’s bound to remember it the next time he’s tempted to do the same.
It’s also important to communicate with them regularly about managing finances. Teach them the value of budgeting so they know how to properly allocate their money across different expenses. With a budget, they learn to prioritize expenses and curb overspending. A pen and paper budget should prepare them for more complex expenses when they turn adults.
It’s also important to teach them to track their expenses. Let them keep a journal of all their expenses so that when they come up short at the end of the week or month, they know where they spent all that money. When the kids eventually own their credit cards, tracking expenses becomes an even more essential activity.
Lastly, the kids need to know the importance of saving money. Teach them to save a portion of their allowance or part-time income so that they’ll have some funds to tap should they need to buy something. As adults, saving is important to meet unexpected expenses and financial goals. The kids need to know the value of delayed gratification which comes in handy when they have more complex responsibilities as adults.
2. Open a Checking & Savings Account
Your child may start off saving in a piggy bank, but as he gets older, he needs to start saving in the proper places. To give kids a real sense of how the financial world works, let them open a savings account. Bring them to the bank, documentation and initial deposit in hand. Explain to them that saving in a bank account is a good way to keeping his hard-earned savings secure.
Encourage your child to deposit a portion of his allowance, cash gifts during birthdays and Christmas as well as money from mowing the lawn or babysitting. Let the child get in awe as his money grows and how compounding interest helps him achieve it. Allowing your child to experience how a savings account works is a good way to demonstrate other related concepts later on, such as opening a debit card and applying for a credit card.
Moreover, research also shows that opening a bank account to the child’s name is highly beneficial in a lot of ways. According to William Elliott III, a University in Kansas in Lawrence associate professor of social welfare, establishing a savings account for the child instills financial awareness. For instance, if a child has a savings account designated for college education, it impresses on him that attending college is an attainable goal. It tells him that he needs to save for that goal, and the progress he is making indicates how far along he has to go.
The Washington University’s Center for Social Development supports this with its own research in 2011 and found that kids even with at least minimal bank savings are most likely to attend college than those who don’t.
As your child gets older, you can introduce to him how a checking account works. When he’s old enough, he would be writing his own checks, so it’s good to practice him young. Also, checking accounts typically come with debit cards. Using the debit card is a good practice for a future credit card, as it allows him to withdraw money from the ATM or shop online.
However, you want to observe your child as he uses the debit card. If he gets too overwhelmed, he might put too many purchases on the card and run the risk of overdraft. You can avoid this by making him use a prepaid card instead as it will limit his purchases with the amount you’ve loaded the card with.
3. Make Them Get a Job
The best way to teach kids about the value of money is to make them earn it the hard way. Sure, you can always give your kids allowances, but letting them work hard for their own money will make them realize the pain of parting from it. The allowance doesn’t count as income.
Not only that, your teenage child desiring to apply for a credit card needs to have a source of income. Under the law, credit issuers are required to check the income capacity of applicants who are aged 18 to 21. They need to see that your child has the capacity to pay the charges on his card; otherwise, he would be denied credit.
It must be noted that your child needs to show credit activity in order to build credit. He needs to use his credit card so that credit bureaus can generate data regarding his financial activities. Without a steady income stream and no to little credit history, it is likely that your child would be perceived as not creditworthy.
To start with, you can give your child some menial jobs. This helps your child to learn the value of hard work and ethics in order to earn a living. When he’s old enough to enter a part-time job, assist him in the application process and train him how to answer interviews. Once he starts earning his own money, you just need to at least guide him (but not dictate) how to control money and not the other way around.
It helps a lot if your child understands how income, credit and financial management work in this world. He needs to know that he needs to work to earn an income and then manage this income wisely to build good credit.
4. Help Them Save for a Secured Credit Card
First-time credit card applicants come face to face with a variety of challenges, such as needing to show a proof of income or getting a co-signer. In fact, the law prohibits young adults who are less than 21 years old to open a regular credit card account without an income source or co-signer. The secured credit card is most likely to be his first one.
A secured credit card is a good way to build credit for applicants who have no credit and those who want to rebuild credit. A secured credit card works functions basically just like any other regular credit cards, except for the fact that you need to provide a deposit before you can use it.
Typically, the deposits range between a few hundred dollars to perhaps a thousand. This will also become your child’s spending limit. The monthly payments will not be drawn against the deposit, but instead needs to be paid every month by the card owner. The deposit is returned if your child defaults or decides to close his account.
Although a secured credit card has low spending limits, it’s also the perfect way to train your child on real credit card use. The best thing about this type of credit card is that it ensures that your child doesn’t overspend. He can only use as much as his available limit. In turn, that also eliminates the risk of going into credit card debt. Once your child has established an excellent credit history with such a card, he can negotiate with the credit issuer to turn it into an unsecured credit card.
Help your child save up for the deposit of a secured credit card. It’s a great way to own a credit account in his name, which in turn, give him a stronger sense of responsibility.
5. Get Them a Student Credit Card
Another good way to open a credit card account under your child’s name is to get him a student credit card. This card is typically available for students and young adults who are at least 18 years old. Your child needs to have a source of income to qualify for it, but in most cases, a part-time work should suffice.
Student credit cards usually have low spending limits, making them ideal for frugal students who need to pay for gas and food, among others. It also usually has low APR, no annual fee and may even come with cash backs and rewards. Importantly, student credit card activities are reported to the credit bureaus, consequently generating data that would make up one’s credit score.
With that said, you want to advice your child about using his student credit card responsibly. The goal of the card is to build credit so that he can easily transition to a real adult credit card once he graduates or lands a better-paying job. Therefore, he shouldn’t use the card to pay for expensive airline tickets or fancy gadgets his part-time income cannot afford. It’s best to use the card for small purchases that he can easily pay to ensure he doesn’t overextend himself and get into debt.
6. Teach Them to Monitor Their Credit
At this point, your child probably owns at least one credit card. The next thing he needs to do regularly monitor his credit. This is important because your credit status and progress inform you of where you stand financially and if you need to start taking action to improve your credit score. Your credit report gives you an overview of your credit health.
It is best to get your child into the habit of checking and monitoring his credit every once in a while. He can pull out a free credit report from each of the three credit bureaus once a year, or avail of paid credit reporting services.
First, he needs to ensure that all information is correct and updated. If he sees an unusual activity in his report, he might have fallen victim to identity theft which he needs to report immediately.
Apart from that, the credit report contains all the juicy details about his financial activities. It’s also an important tool that helps him analyze his strengths and weaknesses, allowing him to create a better strategy to further bring up his credit score.
One of the most important details your child will find in his report is payment history. Basically, this section tells him if he has been behind his due dates. Late payments can aggravate one’s credit score, so its best he knows that beating the deadline is also the best way to beat the interest.
Additionally, payment history displays whether he pays the minimum due amount. Paying the minimum is good than not paying or paying late, but it’s in his best interest to pay the balance in full to keep finances manageable and prevent interest from racking up.
Your child also needs to check out the inquiries made on his credit. These are called “hard inquiries” and the more and often, the bigger the impact on his credit. With that said, your child needs to understand that he shouldn’t try to apply for new credit cards or loans in a short period of time. The lender will pull out or inquire on his credit report to check his eligibility. But if these inquiries are frequent, the lenders will see the application as an act of desperation. To protect his credit score, he must space out his applications far and in between, or better yet, not open a new account if he doesn’t really need it.
Finally, your child needs to be informed of his utilization ratio. This ratio tells him how much credit he has been using against his available limit. Although maxing out the limit is an option, it can detrimental to his credit health. Your child needs to know that he must keep this ratio low, ideally around 10% to 30% against his available credit so that it’s easier to pay the bills at the same time, teach him the value of discipline.
7. Teach Them Responsible Credit Card Use
Responsible credit use isn’t exactly a subject taught in schools. Most of us learn from experience, so it pays to teach your kids what you know about credit responsibility, lest they don’t make those mistakes. Although we have to admit that most of us do fail to be entirely responsible about credit card use at point or another, those mistakes teach us valuable lessons.
Now, your kids need to know how to use their credit cards responsibly as well. You won’t always be there to remind them that a purchase can wreck havoc to their credit health, so it’s good if they can determine a good and bad credit move by themselves.
One of the things that your child needs to implement to build credit is to always pay his bills on time. Neglected due dates can soon balloon into inflated interests that cause the bill to expand out of proportion. Before your child knows it, he’s facing a huge credit card bill that innocently started out with missing the deadline.
It is also important to teach your child to avoid credit card debt as much as possible. Although the credit card is the handiest currency around, you don’t want your child to make an extra large purchase that he can’t afford. Teach him to save up cash for things that he really wants and to put other small, more manageable expenses on the card. If he doesn’t have the money for it, then he can’t afford it. He must strive to avoid putting huge expenses on his card, except of course, if it’s a matter of emergency.
If your child can pay his balance in full and on time, every time, then he should be in a good position to keep building up healthy credit.
8. Make Them an Authorized User of Your Credit Account
Before, getting a credit card was fast and easy. But laws surrounding credit cards have changed over the years; it has become difficult for young adults to acquire a credit card to their name. And so, some parents allow their kids to “piggyback” on their credit account to help them establish good credit.
Piggybacking credit is just another term for authorizing the use of credit card. When a child becomes an authorized user of your credit account, he has the power to use the card for his purchases. However, he is not liable to pay the bill. The main account holder (which is you, the parent) must settle the charges.
His credit account gets to share your good credit standing. Therefore, as long as you pay your credit card bill responsibly, both you and your child should have a nice credit status. But, this is only possible if you and your child observe proper use of credit. For instance, if you’re careful about your credit utilization ratio, but your child frequently maxes out the credit limit, piggybacking credit can prove to detrimental to both of your credit status. You must teach your child first about how to use credit responsibly before signing him up as an authorized user of your account.
It is also possible to get your child as an authorized user of your credit account without letting him use your credit at all. You can keep his credit card and you can continue to use yours responsibly. Your credit’s good standing will still rub on your child’s account.
If you think your child is finally matured to hold a credit card, you may allow him to use his, but not without a word of warning from you. He can use the card but only to a certain amount. If he is working, you can make him responsible to pay you what he owes. You must remember that the goal of letting him piggyback on your credit is to build and boost his credit, but if he can’t do his fair share and irresponsibly handle credit, then you have the option to remove him from your account.
9. Co-sign on Their Low Limit Credit Card
Another easy way to help your child build credit is to co-sign a credit card for them. Like the laws say, if your child is less than 21 years old and has no proof of income, he can get a credit card if someone co-signs for him. The co-signer is most often a parent.
As the co-signer, you relinquish control of credit card use to your child. This is unlike the case of making him just an authorized user wherein your child shares an account with you. In the case of co-signing a credit card, your child takes full control of using the credit card. If he fails to pay his dues on time, you become responsible to pay for it.
For some parents, co-signing is the fastest way to help their kids build credit, especially if they know for certain that their kids are responsible credit users. If you’re using the co-signed credit card as a stepping stone to earning a regular credit card in the future, make sure to discuss its implications to your child and you. Set ground rules for how to use the card and how much he can charge. Make the time to check out the bill together and use this opportunity to discuss good credit habits.
Additionally, your child must be made aware of how bad credit habits can affect you as a co-signer. You’ll see the charges made on the card on your own statement, and from there, you can see if your child is overusing credit or not. If he does, he must realize that not only will you be forced to pay the bill; his behavior could likewise get your credit status in trouble.
It’s never too late to start building good credit, but it’s also in your child’s best interest to do it as early as possible. Credit and finances can both be a complex thing to navigate, but if you slowly introduce the idea of managing money and how it impacts credit at a young age, he should be well-prepared to take on the challenge later on.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.