An early start with credit will give your kids a huge advantage when they reach adulthood.
As a parent, you want to set your kids up for success. And one of the best ways you can set them up for financial success is to help them with their credit.
Most young adults don't know a ton about credit -- only that this mysterious credit score seems to keep getting in their way. Want to rent your first apartment? Your credit score isn't good enough yet, you'll need a cosigner. Applying for a loan or credit card? Same answer. You feel like you constantly need other people to vouch for you, all because you haven't had the opportunity to prove you're creditworthy.
As a parent, if you introduce your kids to credit when they're young, they'll have a valuable head start. They'll build credit earlier, understand how credit cards work, and be less likely to rack up costly credit card debt. Here's what you can do to help.
1. Set them up as authorized users
You'll put your kids on the fast track to good credit by making them authorized users on your credit card. If you do this, your credit card activity will go on their credit file as if it was their own. They'll benefit from the length of time you've had the card and every on-time payment you make.
You can do this for your kids at any age. In fact, one writer even made her 1-year-old an authorized user so he would have a strong credit history by the time he turns 18.
When you make your child an authorized user, you'll receive a credit card with their name on it that's tied to your account. You may decide to give them the card once they're ready, but there's no rush. Their credit will benefit whether they use the card or not.
2. Teach them how credit scores work
Credit scores are undoubtedly a confusing subject that many people don’t entirely understand. Your kids will benefit if you can pass on at least a basic knowledge of credit scores.
Most kids' teenage years are a good time to start learning about credit scores. You'll probably want to keep this simple, at least to start. Here are the key things to go over when you teach your kids about credit scores:
- A credit score is a measure of your creditworthiness, or how likely you are to pay bills on time.
- Your credit score is based on several factors, and the most important is your payment history. If you're late paying your bills, it can do quite a bit of damage to your credit.
- Your credit score doesn’t just determine if you'll be approved for credit cards and loans. It also affects your life in other ways. For example, bad credit means you may need to pay a deposit to get your own cell phone plan, it can lead to higher car insurance rates in most states, and it makes it harder to get approved to rent an apartment.
If you're still wrapping your head around how credit scores work yourself, you may want to review our credit score guide to learn more.
3. Work with them to develop good financial habits
Your kids' financial habits will play the biggest role in how they build credit. The two most important credit-building habits are to always pay bills on time (especially your credit card bill) and not use too much of your credit limit. To clarify how much of your credit is okay to use, it's best to keep your balance to 20% or less of your card's credit limit.
You can explain this to your kids, but for the message to stick, they need to develop these habits themselves. This is another reason why it's good to set your kids up as authorized users. You can let them start using their authorized user cards and have them pay you back for any purchases they make.
It's like a credit card with training wheels. They get the experience of using a credit card and having a bill to pay. You get to watch and point out any potential problems, like if they spend more than they can afford or forget to pay the bill.
4. Be a cosigner for them
Even if your kids build strong credit histories, they may still sometimes need a cosigner. Landlords, lenders, and credit card companies can be hesitant to approve young applicants on their own.
In situations like these, a cosigner can make all the difference. You could help your child get approved for that apartment they want or their first credit card in their name.
There's obviously a risk involved with being a cosigner. You're just as liable as they are for any financial issues that arise. So you should only agree if you're confident your child will be responsible. But if you've taken the time to educate them about credit and smart financial habits, then they should know enough to deserve your vote of confidence.
Credit is an area where a lot of young adults struggle. Some don't understand the importance of building credit, while others enjoy using credit cards too much and get themselves into credit card debt. By schooling your kids on credit at an early age, they're much more likely to use credit cards wisely and build good credit scores.
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