Helping Your Child Establish Credit

Preparing your child for adulthood is daunting. As a parent, no matter how old your child becomes, worrying about their health and safety will always remain in the forefront. However, as they begin to mature into young adults, their financial future becomes a growing concern.  Often overlooked, and yet, equally as important as helping your child choose a career path that is right for them, is helping your child establish credit.  

Here are a few tips to help you begin building credit for your kids.

First and foremost, begin the “money talk” with your kids while they are young. You should begin discussing basic financial concepts like saving (help them open a savings account) and delayed gratification when they are in elementary school. As they get older, introduce more complex concepts, such as insurance, investing, credit cards and borrowing, and explain what credit really means – the building blocks of consumer credit – and why it’s so important. As a responsible parent, you should also make sure your credit habits provide a good example.

In addition to providing a good financial education…foundation, the following steps will help ensure your young, adult child is well on his or her way by the time they are flying solo.

  1. Help them open a checking account. Show your child how a checking account works as well as the penalties associated with them if they overdraw their account or bounce checks. Once they understand and are comfortable with the basics, ease them into a debit card. This gives them some spending independence, while limiting it to the balance in their checking account.
  • Have them get a part-time job. A strong work ethic is a vital part of your child becoming a responsible adult. Having a part-time job in high school provides them with a valuable life lesson – the excitement of watching their savings grow and the frustration of seeing it disappear, especially if it’s due to a poor decision. This lesson is a precursor to understanding credit. In addition, the income provided by a part-time job will help them when they apply for their own credit card.
  • Add them as an authorized user on your credit card.  As long as your own credit habits are sound, this is a good way to help your child establish his or her own credit record.  As an authorized user, your teen will usually get a credit card in his or her name, tied to your account. Typically, this account will also go on your child’s credit record.By setting ground rules for what they can charge and how and when (on-time) payments will be made, you will enhance your child’s understanding of how credit works as well as help their credit grow.

You can also add them as an authorized user without giving them access to the account. Without giving them the possibility…opportunity of overspending, you can still help them grow their credit as you use the credit card and pay it off every month.

  • Have your college-aged child apply for a student credit card. Once your late teen has established good financial habits and income to support a credit line (usually income from a part-time job is sufficient), they may be ready to apply for their own credit card. These cards typically have lower credit limits and higher interest rates than general credit cards.
  • Help your college-aged child apply for a secured credit card. This is another option if your young, adult child is unable to get a student credit card. A secured credit card requires the cardholder to put down a deposit, typically a few hundred dollars, which is usually the credit limit they are given. Because there is little risk to the bank/credit card company with this type of card, most people can get approved.

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