Sooner than you think, your children will be going out into the world. They will very quickly find that, perhaps, the greatest asset they need is a good credit rating and track record. Here’s how you can help. These steps, when executed carefully and responsibly will give your child an upper hand as they venture out into the world, in which a good credit rating is necessary. Some of the below items have been abused by irresponsible parents who have ruined their own credit rating, and then go on to wreck their teen’s in the same way. If you decide to employ any of the tactics below, do so with your child’s permission and active involvement. This is not a decision you make for them, but an opportunity to pass on valuable life skills, and set them up for the future.
Open a savings and/or checking account
Help your child open a checking and/or savings account that comes with a debit card. If under 18, a parent must help set up these accounts. Explain that the savings account is for investment, and the checking account is used for making purchases. Your child’s financial responsibility will be reflected in the way these accounts are handled. Help teach your child about credit by explaining that any overdrafts as a result of using the debit card may negatively affect their credit rating. This will also give you the opportunity to learn how well your child handles their money before giving them access to credit.
Give your Child Limited Credit to Learn With
To help build your child’s credit, they will need to have their own credit cards, or have loans in their own names. If the card is in your name with the child as an authorized user; or if the loan is in your name only with the child making the payments, it may help your track record, but will do nothing toward building credit for your child. Whether applying for a credit card, or obtaining a used car loan, your child will likely need a co-signer. Also, to obtain an auto loan, the child must be 18. Prior to your teens 18th birthday,consider starting your teen off with a credit card with a very low available credit, maybe $100-500, with you as the cosigner. Once they’re 18 and have hopefully proven themselves, decide if they’re ready to be responsible for a car payment.
If you agree to co-sign with your child, you are responsible for paying the bills if your child falls short. Depending on the circumstances it, too, may reflect on your credit score. This is another reason to make sure they’re acting responsibly. They could be running up your bill.
Take advantage of bills you already have to pay.
Consider putting one or two household bills in their name. By doing so, and making sure they pay them regularly and on time, you will be adding one more way to help teach your child about credit—at the same time increasing their credit rating. You might even avoid giving them the money to pay these bills. Paying out of their own pockets will help them to learn fiscal responsibility. Sure, you can reimburse them later on!
Making timely payments
Make sure they understand they must stay within their credit card limit, which will probably be quite low for a first time user. Explain that running up a high bill and paying only the minimum monthly payment, even if it’s on time, will not help their credit score. The credit card use, or loan history, is reported to the credit bureaus every month. It takes a responsible user several years to build a respectable credit rating.
Credit cards to build your teens credit?
If you’re unsure of your child’s ability to handle the responsibility that goes with a credit card, consider a secured credit card. This requires a security deposit equal to the amount of the credit limit, thus building credit for your child without so much worry on your part. If your child likes to shop at a store that has a secured debit card program, this is another option. But make sure you know how much your child loads onto the card.
A child’s first venture into the world of credit is an exciting experience for them, but an untravelled road for the parent. Each child will be different—one may need to be held back on their first shopping spree, another may be more hesitant about using their newfound credit. It’s important that you keep close tabs, explaining what they need to know, or just ‘putting the brakes on’ for a while until the child gains more understanding.
Whatever you decide to do, come in and talk to one of our Financial Service Representatives. We’ll be glad to help you get your child on the right path to financial responsibility.