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Our goal is to instill healthy financial practices in our kids and help them grow up to make wise decisions about money. One of the more important, but scariest, ways to help them is in building their credit.
Building good credit early will pay off early on helping them rent an apartment and have lower insurance payments. It will also be crucial to one day purchasing a home and other important aspects of being an adult.
There are multiple ways for teens to build credit, including credit cards. While credit cards are sometimes vilified, they can be a healthy part of your financial life if you use them responsibly. We use credit cards, pay the balances off every month, and use the rewards points for other things. Instead of the credit card companies making money off of us, we’re making money off of them!
Here are 10 tips to help teens build credit, not just limited to having a credit card.
10 Tips to Help Teens Build Credit
Open up a checking/savings account for them
The first step is for your teen to have a place to access the money they earn or are given. It makes the most sense to open accounts where you as the parent already do your banking. This makes transfers easy when necessary and lets you easily monitor their account as they’re learning how to manage money.
Have them get a job
In order to build a credit score, you have to have some income to pay bills with. Encourage your teen to get a job so they can start saving money and learning about budgeting.
Explain how credit scores are calculated
Your teen may be working and saving money but not really care about building credit. It will help if you explain why credit scores are important, and also explain how they’re calculated. Your credit score is mostly based on:
- the number of open accounts you have
- how much of your available credit you’re using (you want to stay under 30%)
- the length of your credit history
- whether you’ve missed payments.
While your kids probably don’t need credit right now, but if they’ve been building credit for 3-4 years before they try to buy a house, they’ll be in great shape!
Teach them how to check their credit score
Credit Karma is a free place where everyone can check their credit score and see how they’re doing. While the numbers aren’t exactly what you’d see if you pulled the actual credit reports they are very similar. They also give lots of personalized tips on things you can do to help increase your credit report.
Add them as an authorized user on your credit card
Even if your teen hasn’t turned 18, you can add them as authorized users on your credit card. This will allow them to use your credit card and have it associated with their names. However, remember you are ultimately responsible for paying off the purchases!
A safe way to do this would be to open a new credit card and call the company to put a low limit on the card. Most companies will not understand why you don’t want a $20,000 limit… but in this case you don’t! Put a $500 to $1000 total limit on the card and let your child use it as “their” card.
Model not carrying a balance on your own credit cards
The best way to teach something is by living it out. Model for your kids not carrying a balance on your own credit cards. We treat our credit cards like debit cards and only buy things with them that we’ve already budgeted for. This may be a good time to open up at least part of your family’s budget and show them how you manage your own money.
Have a household bill put in your teen’s name
You can have a household bill like water, electricity, or Internet put in your teen’s name. You can still help them pay it, but if they are using their checking account to pay the bill, it will help them build credit.
Using free services like Experian Boost they can even get credit built by paying the bill on time each month.
Get them a secured credit card if they’re over 18
A secured credit card gives all the perks of building credit with no risk. You’ll pay a security deposit when you open the card. Your deposit is the available balance on the card. If you ever miss a payment the bank uses the security deposit.
Tip: Many also don’t do a credit check, so your credit report doesn’t start out with a hit!
Have them apply for a student credit card
Student credit cards usually have no fees. This is a great option for a teen who has already shown some responsibility with money. Impress on your kids the need to only have one card and again the importance of paying it off each month!
Take a Small Student Loan
Your kids may already have student loans, but if not taking a small loan each year and paying it off with a summer job is amazing credit builder. Many student loans available through the FAFSA have no interest while you are in school making it even easier to pay off. This also helps your kids to have a personal investment in their own education!
Look for a credit builder loan
This is a small loan, usually offered by credit unions or community banks, that is for people who are starting over after bankruptcy or who need to build credit. These are not super common so you may need to ask around, but this could be a good option as well to help teens build credit.
Do you have a teen who is looking to go to college? US Bank is offering a scholarship sweepstakes to those who complete certain financial lessons! For teens who are already learning about money and how to manage it well, this is a very easy way to potentially have more money for college.
