Building a solid credit history is a valuable asset for any person. This is doubly the case for a young person, who is otherwise distrusted by banks, insurance companies, even their own parents. After all, the best way to get credit is to have credit. And how can one get credit without credit?
Parents can help their teens get a leg up in the world. Below, I’ve laid out several things parents can do to help their teens establish their credit history. But before I do so, I want to say this–parents shouldn’t just be DOING this for teens. Teens should be right in the middle of this, if not searching for this article themselves. Parents can raise the idea with the teen, but it should be THE TEEN who goes out and takes the steps to establish their credit. The teenager should not be receiving the gift of good credit from their parents without putting any effort into it.
I’m just saying.
How adults establish good credit
To have a credit score, the bare minimum a person needs is at least one account that has been open for at least six months. In addition, a person needs one creditor reporting your activity to the credit bureau.
Here are the ways adults get their credit history started:
- Open your own checking and savings accounts. These accounts will not establish your credit history per se, but accounts in good standing will help you when you seek credit in the future.
- Secured Credit Card. Apply for a credit card that is secured. This kind of credit card is one that is “secured” with a cash deposit you pay to the company up front. In most cases, the deposit amount is the same as the credit limit. The deposit is returned to you when you close the account.
- Department Store or Gas card. These types of credit cards can be easier to obtain than a regular card. They tend to have lower credit limits, but have higher interest rates.
- Credit-Builder Loans. The purpose of a credit-builder loan is to help people build their credit scores. This is called a loan, but it could better be called a forced loan program. Instead of receiving the money from the bank up front, you make payments to the bank per the terms of the loan. Once you’ve made all the payments, the bank releases all the loan funds to you.
- Open Regular Accounts with a Co-signer. This is pretty straight forward. When you have no credit history associated with your name or SSN, you can get an account with someone else, and once you have your own positive history, you can then apply for your own accounts.
- Become an authorized signer on another account. In this scenario, the account doesn’t belong to you, and its not in your name. You just have a card of your own, and the right to use the account.
Historically, while late utility bill payments or cell phone bill payments hurt your credit score, on-time have not helped build credit. In recent years, some of the reporting agencies have added an option for you to allow them access to your bank account information to verify your utility and cell phone bill payments. Using these types of services, individuals who lacked sufficient information for a credit score are able to become scorable.
Can my teen build credit like an adult?
Absolutely. Almost everything listed above is something that a teenager can do.
Your teen can open his own checking account, and his own savings account. He can write checks, use his debit card, and make sure that the account is never over-drawn.
While it seems intimidating, your teen can apply for a credit card. There are a few ways to go about this, as noted above. He could seek the secured card, a gas card, or even a department store card. Some companies even offer a student card for young cardholders like your teenager. These cards generally have a high interest rate and low limits, but they can be a good place to start.
For credit cards, your child may be required to post a deposit up front, or get you to co-sign on the card. (Keep an eye on the card if you are a co-signer).
Your teen will most likely also qualify for a credit builder loan. These are really low risk for banks and credit unions (since they aren’t advancing any money), so there is a greater likelihood that your teen will be able to find an available loan to apply for.
And finally, there is nothing stopping you from adding your child as an authorized signer to one of your accounts.
A key component to helping your teen to build credit is to help your teen understand the value of credit and his credit score. Once he is off to college, there will be opportunities for him to apply for cards on his own, Many young people struggle while learning how to use credit cards in college. It can take many years to clean up these initial missteps.
As a parent, talk to your child about the costs of a credit card, and what happens if you don’t pay off the balance each month. Or what happens if you use the credit card and you don’t have a job to make the payments.
Set an example
Finally, lead by example. Let your child see you use your credit card, and then let them see you check the statement and make the payments on time. Talk about the importance of making the payments, and making them on time. Have a discussion with your child about whether it makes sense to buy particular items on credit, and show them that you can just walk away from a purchase because it doesn’t make financial sense to buy it on credit.
If you preach financial responsibility to your teen but you don’t practice it yourself, there isn’t much chance that your teen will do as you say, but not as you do.
Emily Anderson is a mother of three children, all under the age of 10. Located in the Pacific Northwest of the US, Emily is a mom and part-time blogger, jumping in front of the computer when the kids are sleeping. She started this blog in April of 2019 and is proud that the blog is now paying for itself. If you want to know about her journey as a blogger, check out out her personal digital journal or her post about failing her way to blogging success.