Helping Your Teen Build Credit

Joyful positive girl making an online payment

As parents, we want nothing but the best for our kids, but sometimes there's a disconnect between that desire and our actions, or lack thereof.

Case in point: personal finances. How much time have you spent with your kids ensuring they will be well-equipped for the financial challenges the big, bad world will undoubtedly throw their way? Probably not a lot.

One of the biggest challenges they will face is managing credit and debt. If you're like me, you got your first credit card after you left home. That's not ideal. Beyond just being able to borrow money at a competitive rate, everything from potential job opportunities to insurance rates and housing options is impacted by how well we manage credit. That could make an earlier start appropriate.

Yes, credit can be dangerous, but starting early provides an opportunity to teach good habits and oversee the process while your parental influence is at its peak.

Here's a five-step process to get your teen off to a good start with credit.

  1. Start with debit. When it comes to training, I'm sure you've heard this before: crawl, walk, run. Before they start running -- using a credit card -- cover the basics. Consider setting them up with checking and savings accounts. Familiarize them with how these accounts work and their distinct purposes. Their first plastic should be a debit card. This will allow them to learn a valuable lesson: Plastic is a convenience, not a means to spend what they don't have.
  2. Put on your drill sergeant hat with a credit boot camp. With banking basics behind them, it's time to start talking credit. Notice that I said talking, not using. Make sure your kids understand that they will be building a credit reputation from day one and that reputation matters. Ensure they understand the basic factors that make up a credit score and the associated good behaviors: Pay on time, every time and not owing a lot should be top of mind. While you're at it, don't forget to explain credit card annual fees, interest rates, and the peril of minimum payments. This "boot camp" will likely happen over the course of months of discussions.
  3. Set them up with a secured credit card. This type of card is a great way for someone starting out to build -- or someone starting over to rebuild -- their credit. The limit of the card will be the same as the bank deposit that secures the card. An attractive feature of this approach is that it limits the risk with no option to binge spend.
  4. Open a joint credit card account. Co-signing for a credit card is a nice next step. Because you are both responsible for what happens, you'll both have access to what is happening. Look for a lower limit card (you still want to minimize risk). Once you make this step, the training wheels are coming off. Some folks consider adding their kids as an authorized user. This technique can work also, but it doesn't necessarily offer all of the credit-building benefits to their credit record as a joint account would.
  5. Continue to consult. I spoke with my parents about financial matters well into adulthood, and you should do that with your kids too. No one has their best interest in mind more than you do. Making money talks a part of your routine conversations today will help ensure they are comfortable coming to you in the future.
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