Three things you can do today to help build up your child's credit.
Parents have a profound influence on their children -- including what they learn or don't learn about finances. Most kids' initiation into the world of money comes from having a piggy bank or weekly allowance.
Saving money is not the only critical skill parents can pass on. They can also help their children build good credit from an early age. Here are the steps you can take to help your kids build a solid credit score, which will come in handy later in life.
How good credit helps young adults
Having good credit opens doors throughout adulthood, especially when making large financial decisions like buying a house or car.
"If you have a high credit score, you can use it to your advantage," says Deserve CEO, Kalpesh Kapadia. Deserve is a credit card company geared towards helping college students and young professionals build their credit. Kapadia points out that even prior to the pandemic, those aged between 18 and 29 weren't building a lot of credit history. "They were using debit cards," he says. "They were Ubering everywhere, so they weren't buying cars."
Indeed, October data from Experian shows the average FICO® Score among Gen Z (aged 18-23) is 674, while for millennials (aged 24-39), it's 680. Anything above 670 is considered a good score, but these age groups are still well below the national average of 711.
"What ends up happening," says Kapadia, "is that when you go to get your first apartment and move out of your parents' basement or graduate and move out of college dorms and go to work, you have no credit history."
And that, he explains, can cost you money. "People charge you higher deposits for an apartment rental. They charge you more when you need a car to get to work."
Three ways parents can help their kids build good credit
The good news is that you don't have to wait until your children become adults to start them on the path to good credit. Here are three actions you can take right now:
1. Add your kid as an authorized user on your credit card
If you add your child as an authorized user on your credit card, they can get started earlier than they would on their own. "If you look at the five factors that drive your credit score," says Kapadia, "one of them is the length of your credit history, and your first card determines the length of your history."
Contact your credit card issuer to find out whether they report authorized users to the credit bureaus. If they do, go ahead and add your child as an authorized user.
Check with your card issuer for any age restrictions, it's relatively low in some cases. American Express, for example, only requires authorized users to be over 13 years of age. They don't report credit information to bureaus until an authorized user turns 18, though.
You'll receive a credit card in the mail featuring your card number, but with your child's name. You can either set the card aside and let them build credit passively, or give them the card as a kind of card training wheels.
2. Sign them up for a starter credit card
Another option is to get them their own credit card. You have to be at least 18 years old to apply for your own card. Also, keep in mind that your child is the one applying for the card and will be subject to a credit check like anyone else. With limited credit history, their choice of cards will be limited.
Look at credit cards for people with bad credit. You'll also find some companies like Deserve don't place as much weight on your credit history. Kapadia says, "Once you turn 18, you can get a card from us. We use your banking data to authorize you. And we report to all three credit bureaus."
Another option is a student credit card. Many card issuers have cards geared towards college students that are a great introduction to credit cards.
3. Teach them how to manage their finances
Parents shouldn't leave financial literacy to schools, and education can start much earlier in life. According to the Council For Economic Education, just 21 states require high school students to take a personal finance course to graduate.
Use teaching moments, like grocery shopping or trips to the bank, to help your kids understand financial concepts like:
- How to spend below your means
- The importance of making payments on time
- The difference between debit and credit cards
- What compound interest is
- How loans work
- How to budget your money
As Kapadia explains, that knowledge will stand them in good stead. He says, "Just having a basic understanding of how not to spend more than you have, how to build credit, how to save, how to invest. It's important to build that foundation."
Teaching your kids about money doesn't have to be boring, either. Use everyday situations to teach bite-sized lessons or even make a game out of learning. Like many life lessons, your kids may not appreciate it when they are young. But that financial foundation could save them considerable money and heartache later on.
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