Like it or not, using credit is an important part of adult life. If you plan on renting an apartment, buying a car, or taking out a mortgage, you need a credit history. Some employers check credit reports as part of the job application process, especially if the job is finance-related. Plus, the better your credit score is, the better interest rates you’ll get on everything from car loans to mortgages to your next credit card. Having good credit could literally save you thousands of dollars — or more — over your lifetime.
So it’s important to help your child build credit — and if you wait until your kids are going off to college to have the credit conversation, it’ll be too late. Here’s what you should do to help your child learn how to manage money and build a solid credit history, from the very first piggy bank to the very first credit card.
Start with a savings account and checking account
A child’s first savings account often comes in the form of a piggy bank; however, once your child is elementary-school-aged, it’s time to make a trip to the real bank and open up a real savings account. Many banks have savings accounts specifically designed for children, with the option to deposit your child’s allowance directly into their account and help them set savings goals.
Children can make both deposits and withdrawals from a savings account, but by the time they hit middle school, it’s probably time to graduate to a teen checking account — that way, your child can make purchases without having to withdraw money from the bank first. A savings account tends to reward goal-oriented spending (a child might save up for a special toy, for example). A checking account is a good way to start teaching teens good financial habits: When you have the ability to purchase items right away, how do you keep track of how much you’ve spent? Do you need to plan ahead and make sure the money in your checking account lasts until your next allowance payment or birthday check?
Add a debit card or prepaid card
You’ll probably want to teach your child how to write a check (it’s still an important life skill!) but you’ll also want to teach them how to pay with plastic. After your child opens their first teen checking account, setting them up with a debit card is a natural next step. Debit cards allow young people to practice using card readers, withdrawing cash from ATMs, and making online purchases — plus, it’s a lot more convenient than a checkbook!
But it’s easy to put too many purchases on a debit card, accidentally overdraw your account, and end up paying overdraft fees. If you think that’s going to be an issue for your child — or if it becomes an issue for your child — consider giving your child a prepaid debit card instead. These cards come preloaded with a certain amount of money; once the money runs out, the child can no longer make purchases until more money is added to the card.
Prepaid cards are often weighed down with fees, so do your research before choosing a good prepaid debit card for your child. Start with our list of the best prepaid debit cards.
Help your child open their first line of credit
After your child feels comfortable using a debit card or prepaid card, and is successfully keeping their spending within the limits of their available money, you can start thinking about opening that first line of credit. This transition generally happens when your child is in their late teens, so don’t feel rushed. Once you and your child are ready, here are your options:
Add your child as an authorized user on your credit card
The easiest way to give your child a line of credit is to add them as an authorized user on your credit card. Your child will receive a credit card of their own, but it’ll be linked to your credit card account — which means you’ll be able to review their charges. You’ll also be the person responsible for making payments on the card, so your child will have to make their monthly credit card payments to you instead of the card issuer. In other words, they’ll have to pay you back for everything they charge to your credit account — and if they buy something they can’t pay off, you’re on the hook!
If your child is an authorized user on your credit card, the way the two of you use the line of credit can affect both of your credit scores. Help your child start building a solid credit history by practicing good credit card habits: don’t make late payments, don’t max out the credit card, etc. Be a good credit role model for your child, and both of you will benefit.
Help your teenager open a student credit card
If your teen is heading off to college in the fall, it might be time to apply for a student credit card. These cards come with relatively low credit limits, are designed to reward typical college student spending (travel, gas, restaurants), and in some cases offer cash rewards for good grades! Although some student credit cards only allow students to apply, others are open to non-students as well. Your teen doesn’t need an extensive credit history to get a student credit card, either — these cards are meant to help young people build their credit, and you don’t need a lot of previous credit experience to get one.
Check out our list of the best student credit cards to learn more.
Consider a secured credit card
Secured credit cards are also good ways for young people to build credit, especially if they currently have a low credit score. With a secured credit card, your teen would need to make a secured deposit — often just a few hundred dollars — onto the card, and then would have a credit limit generally equal to their deposit (although some secured credit cards increase their credit limit over time).
Secured credit cards are good starter cards because they deliberately limit the amount of money your child can charge to the card — so there’s no opportunity to impulse-buy a $2,000 round-trip ticket to Rome, for example — and because the secured deposit helps protect your child from running up a debt they can’t pay off. Secured credit cards are also designed to help people build their credit and raise their credit score, if the card is used responsibly.
Take a look at our list of the best secured credit cards to see if they might be a good option for your child.
Co-sign your child’s credit card
Another way to help your child get their first credit card is to serve as their co-signer. The Credit CARD Act of 2009 made it more difficult for people under 21 to get credit cards of their own, but co-signing a credit card with your child can be a way around that issue. When you become a co-signer on your child’s credit card, you and your child share responsibility for any debts charged to the card — and your child’s credit habits could affect both of your credit scores.
You might wonder whether it’s better to keep your child as an authorized user on your credit card until they turn 21, instead of serving as a co-signer on their credit card. Here are the two benefits of co-signing your child’s credit card:
- They’ll be the person making payments to the credit card account, not you. Generally, with an authorized user relationship, you’ll make the credit card payments and your child will pay you back for any charges they made to the card. At some point, your child will need to learn how to make their own credit card payments.
- While being an authorized user on your credit card can benefit your child’s credit score, having a credit card of their own will do even more towards helping your child build a strong credit history.
Teach your child how to use credit responsibly
If you’ve been teaching your child good financial habits since the piggy bank days, they should be well-prepared to use credit responsibly. As your child graduates from savings account to checking account to a debit card, help them learn how to spend within their means, avoid overdrafts, and plan for the future. If your child makes a financial mistake, such as making an impulse buy that prevents them from having enough money to buy a friend a birthday present, you might be tempted to bail them out and slip them a little extra cash — but keep in mind that some lessons are best learned the hard way. (Plus, your child will learn how to be resourceful; there are lots of ways to give birthday presents that don’t require money!)
Credit cards, however, require some specialized education. Make sure your child understands how their use of the card can affect their credit score; teenagers can probably figure out that late payments are a bad move, but they might not know that credit bureaus also look at how high their current balance is — or that higher credit card balances can equal lower credit scores. (It’s called the credit utilization ratio.)
If you could use a refresher course on credit scores, credit reports, and using credit responsibly, here’s a step-by-step guide. You should also ask your teen to read our article on how to handle your first credit card — or, better still, read and discuss it together. The more you talk to your teen about how to handle credit, the better prepared they’ll be to start building good credit habits of their own.