Helping your teen build credit will give them an advantage when borrowing for a student loan, taking out a mortgage or, even in some cases, finding employment in the future.
The following is a guest post by Rebecca Safier who writes for Student Loan Hero about education, careers, and other personal finance topics.
Credit scores are like the towers in a game of Jenga. They take a long time to build up, but one small mistake could bring them crashing down.
Part of the reason credit scores take time to build is that credit length makes up a big part of them — 15 percent, according to FICO.
As a parent, you can help your child get a head start on establishing credit at a young age, as well as teach them what mistakes to avoid.
With a strong credit score, your child will have an easier time borrowing a student loan, taking out a mortgage or, even in some cases, finding employment in the future.
So how can you assist your son or daughter in building credit in high school and beyond? Here are four approaches that will help.
1. Have conversations about responsible credit use
One of the best ways you can help your child build credit is through financial education. Setting them up with a line of credit could do more harm than good if they don’t know how to use it the right way.
Take time to discuss how credit scores work and why they’re important. Go over what they need to know about credit cards and the importance of paying off their balance in full every month.
“Most teens are not prepared to handle money as they should — they are still in the learning process,” said personal finance expert Debbi King. “You want to teach them about credit cards and finances and help them build their muscles so that they can be successful in their finances when the time comes.”
Before setting up your son or daughter with a credit card of their own, encourage them to develop responsible money habits, including following a budget and avoiding the temptation to overspend.
You could also share your own experiences with credit, whether you were successful or made mistakes in the past. Invite your kids to ask questions to make sure they fully understand these financial concepts.
When they’re ready, you can consider taking more concrete steps to help them build credit.
2. Add your child as an authorized user on your account
Kids typically don’t become eligible to open their own credit card until age 18, but you can establish their credit history even before that by adding them as an authorized user on your card.
In fact, many credit card companies allow you to add your child as an authorized user at a young age. Assuming your account is in good standing, your line of credit could positively impact your son or daughter’s score.
On the flip side, any red marks or late payments could drag down both your credit scores. What’s more, even though your child will get their own card, you will still be on the hook for paying your bills.
That said, you don’t have to give your child the card. You could set it aside in a drawer or instruct them to use it only for emergencies.
Whether they actually use the card, make sure they understand the importance of responsible spending and paying off their balance in full every month.
3. Help your child sign up for the right credit card
Teens become eligible to take out a credit card at age 18, though those without a steady source of income will have trouble doing so without a co-signer.
If your child is ready to handle a credit card responsibly, you might consider cosigning their credit card application. Of course, cosigning means your credit score is also on the line in the event they miss payments.
If you’re sharing a line of credit, make sure you’ve discussed expectations around spending and repayment. Talk about monitoring the account and setting up automatic payments so that they never miss a month.
If you don’t feel comfortable cosigning, an alternative is to wait until your child is 21, when they will have an easier time qualifying on their own.
They might start with a low-limit student card, store card or even a secured card, which has built-in spending limits since it requires a deposit upfront.
As long as they’ve established responsible financial habits over the years, this first card could be one more step along the path to building strong credit.
4. Discuss the best ways to pay off student loans
Nearly 70 percent of students take out student loans to attend college, and this debt can have a major impact on their credit scores.
Missing payments could drag down a credit score, and going into default could completely destroy it. On-time payments, on the other hand, could boost a score, as could paying off this debt ahead of schedule.
To ensure your child stays on track, talk to them about earning income as a college student, as well as their options for student loan repayment.
“There are now many more choices for loan repayment than in the past,” said Abril Hunt, outreach manager for ECMC, a nonprofit that helps families plan for the costs of higher education. “Informed students who know what their payments will be have an easier time keeping up with payments and planning for them.”
Just as you helped your child build credit early, they might start paying their student loans while in college as a way to get ahead of interest charges and move up their repayment date.
And if they end up needing a private student loan, help them choose the right lender so that they don’t pay more interest than needed.
It’s never too early to develop smart money habits
Although your teen might not be ready for their own credit card, that doesn’t mean you can’t start helping them build credit.
Adding them as an authorized user will establish their credit history early, even if they’re not using a card until a few years from now.
Perhaps what’s more important than giving your child a credit card is teaching them how to manage money.
By developing good financial habits early in life, your child will be on track to establishing the kind of credit history that makes it easier to navigate life’s major milestones.