How to Get Your Teenager Building Credit Now
by Elizabeth Aldrich | May 12, 2019
A strong credit history can give you access to many benefits, from a solid low-interest credit card to the best rates on mortgage loans and auto loans. Unfortunately, 26 million American adults have no credit history with national credit reporting agencies. Without a credit history, they won't be able to access credit, and if they ever want to buy a car or a home, they'll have to do it in cash.
That's why it's smart to help your teenager start building their credit history as early as possible. By working together to begin to build your teenager's credit now, you can give them a jumpstart on their financial future.
Why it's important to start building a credit history early on
Your FICO® Score is made up of five categories, with each carrying a different weight. Your length of credit history makes up 15% of your score and includes factors such as the overall length of your credit history and the age of each of your accounts.
It only takes a few months of credit card payments to earn a credit score when you're building credit from scratch. However, having a short credit history and slim credit file can keep your score down and prevent you from qualifying for everything from the best rewards credit cards to low-interest mortgage and auto loans. In fact, many lenders will want to see that you have responsibly juggled a few different credit accounts at once or have several years of on-time payment history before they'll consider handing money to you.
It can take years to build a credit history that's substantial enough to boost your credit score. The sooner your teen starts building their credit history, the sooner they'll achieve excellent credit and start using it to their advantage.
The best ways to help your teenager build credit today
There are a variety of simple steps you can take now that will have a lasting positive impact on your teenager's credit history.
1. Tell them to open a checking and savings account
A new credit scoring model will take banking activity into account, helping those who have no credit history. That being said, a checking and savings account is unlikely to directly impact your teen's credit score in the immediate future, but it will get them started on building a relationship with your local bank or credit union. This can help them qualify for a credit card with that institution more easily in the future.
2. Cosign your teen's credit card
Cosigning is the best way to help your teen qualify for a credit card with low interest rates and low fees while still holding them responsible for making payments. However, all of their credit card activity will impact your credit score -- if they run up a balance or make late payments, you could see your score tank. In addition, if your child fails to make payments for an extended time period, you will become responsible for paying on their behalf even though you aren't the primary account holder.
3. Have them apply for a student credit card
There are a number of options for student credit cards that are designed specifically for college students, and many come with no annual fee and even a rewards program. These are great benefits, but it might be difficult for your teen to qualify, especially with no credit history.
4. Consider a store credit card
Store credit cards are easier to qualify for and have lower credit limits, but they also come with extremely high interest rates and are notorious for getting consumers into debt. If you choose to go this route, make sure the card is only used occasionally and always pay off the monthly balance in full to avoid high interest charges.
5. Help them apply for a secured credit card
Plenty of secured credit cards have no credit requirements, making them an accessible option for building credit. The downside is they tend to have higher fees and require a security deposit upfront. That being said, they are ideal for building credit, and the best secured credit cards have low deposit requirements.
6. Add them as an authorized user on your credit card account
This is a great way to have your teen benefit from your healthy financial habits. However, as the primary account holder, you will be immediately responsible for any and all charges they make. While this is an easy way to give them an immediate bump in their credit score, it's not without risk.
7. Advise them to get a job
While having a job won't directly impact their credit, they will be able to show that they have a regular stream of income. This will make them more appealing when they apply for their first credit card. It will also teach them to value their money and spend it wisely.
Although you will be taking the lead, be sure to get your teenager involved in the process. This will allow them to start building their own healthy financial habits while still having you as a safety net as they learn.
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