Good credit is earned through many years of making good decisions. However, it doesn't take a lot of time to ruin credit. You can help your child establish money habits that positively impact their credit score. Developing a good credit score helps young adults with much more than financing. It affords favorable terms for necessities, such as lower insurance premiums and loan rates.
The minimum age to apply for a credit card is 18; however, you can give your child a leg-up with the following here are 5 tips parents can take to help establish their child’s credit score.
1 Start teaching your child about credit while they're young.
Credit scores are like grades; submitting assignments on time positively impacts your grade as opposed to late submission. Similarly, if you make your payments on time, you are contributing positively to your credit score.
Take the time to reinforce the concept that items relating to credit - credit cards, loans, etc. are not free money. Help your child understand credit should be seen as a financial tool, not an excuse to buy things when lacking cash. Be sure to emphasize how credit overuse and abuse can cost more than money- it can significantly erode one's credit score.
No one likes to read terms and conditions paperwork, but knowing what amount of interest you are signing up for is crucial. It’s pivotal that your children understand what interest rates are, how they work, and the finer details associated with credit accounts. Don't forget to highlight the difference between recurring, secured, and unsecured credit.
2 Add your child as an authorized user on your credit card.
A great way to build your child’s credit before they turn 18 is to grant them authorized user access to your credit card. Please note, the earliest a child can be an authorized user is 13 years old. Before taking this step, call the card issuer and verify they report to all three credit bureaus. If the issuer doesn't report to all three, consider using an alternative card.
Listing your child as an authorized user, extends the opportunity to use your credit to help establish their credit. This is a point you should stress with your child by reviewing monthly statements and explaining the credit card statement. This learning experience allows real-time examples of the exchange between what an item costs and the price paid when purchasing an item with credit.
3 It's never too early to start saving.
There are multiple reasons to save before applying for credit. Developing a savings account can teach your child the importance of having money set in case of an emergency. Lenders will often ask for information on your income and assets. Lenders will use savings accounts to make lending decisions.
A secured credit card offers another great saving opportunity that is directly linked to credit use. Secured credit cards function the same as standard credit cards, except when the cardholder uses a cash deposit upfront that represents the line of credit associated with the card.
4 Co-sign your child's loan or lease.
Applying for a loan can be difficult when you have little or no credit. If you have the ability to serve as a co-signer on your child's loan account, consider the potential risk to your credit. This opportunity provides your child with a lesson about the many benefits of credit. You'll also have the ability to monitor activity to be sure your credit isn't being jeopardized. Additionally, co-signing your child's loan helps establish credit without opening a credit card.
5 Encourage your child to regularly review their credit report.
Once your child has started their credit journey, encourage them to regularly view their credit report to make sure all credit accounts (cell phones, utilities, rent, etc.) are reported accurately. Every 12 months, they can request a free credit report from each credit reporting agency (Equifax, Experian, and TransUnion).
Establishing credit can be difficult for young adults if their parents have poor credit. If this is your situation, don't be discouraged. Rebuilding credit can be difficult, and it takes years for bad marks to come off a credit report, but small changes can make a big impact. Help them learn from your mistake, so they avoid adopting bad habits that can lead to poor credit.