As a parent, you want your kids to have a leg up in this world, which is why you move to areas with good schools and encourage them to excel in sports and their other interests. It might be challenging to even think about your kids having credit reports and credit scores when you’re still driving them to soccer practice. The fact, though, is that sooner rather than later their credit rating could make the difference in how far they go, and how fast they get there, once they’re out of the nest.
Putting your kids on the road to establishing and maintaining good credit starts with education. You’re the best person to determine when your kids are ready to start learning about good money habits. Early teens are a good time to start talking about saving, budgeting, and being honest about money, but don’t hold back knowledge if you have a child who shows an interest in understanding finance at a younger age. Apps such as Bankaroo and iAllowance can help today’s smart device-savvy kids learn money-management concepts. In general, your kids are ready to handle having a credit card when they show good judgment about saving and spending their allowance or earnings from a part-time job.
Parents with good credit ratings sometimes plan to co-sign for any loans or credit cards their kids need, which makes it easy for young adults to establish credit. Co-signing has its drawbacks, though, the biggest being that the parents remain on the hook for any bills their kids neglect to pay. Ultimately, co-signing does work for some families, but not for all.
Just because you don’t have good credit doesn’t mean you’ll have a hard time helping your kids establish credit. If your kids are under 18 years old and you have not-so-great credit, consider signing up for a secure credit card, which requires a cash deposit, and making your kids authorized users. An authorized credit card user can be any age. Giving them a limit as to how much they can spend and helping them track of payment dates can help them establish good habits early on. For a secured credit card to help your child establish credit, make sure that you pay it on time, all the time, and that you keep the balance under 30%.
With good credit, you can also make your kids authorized users on your existing credit cards, which can boost their credit scores fast if you’ve always pay the bill on time and have a low balance. Should unforeseen circumstances happen and you can’t pay the credit card bill, just remember that both you and your kids’ credit scores will take a hit.
Kids age 18 or older can apply for their own credit cards, but it’s a good idea to order their credit reports from all three credit bureaus -- Equifax, Experian, and TransUnion -- first. You’ll need to confirm the spelling of their name, their address, and social security number. Identity theft can happen to anyone, so it’s vitally important to review each credit report to verify that no accounts have been opened using their names and social security numbers. With a clean slate, your kids can build credit on their own.
Consumers establishing credit, who have clean credit reports, usually qualify for unsecured major credit cards with very low limits, which is often perfect for young adults in college and working part time. They can also sign up for store credit cards, which also help consumers establish credit because they report to the credit bureaus. Store credit cards typically have high interest rates but can be stepping stones to credit cards with lower rates and better perks if managed properly. Debit cards won’t help your children build credit even if they have Visa and MasterCard logos.
Building credit takes time, and the sooner your children start building credit the better. Even when they’re on living on their own, keep the conversation going by giving them little nudges reminding them to keep an eye on interest rates and annual fees, and to keep their spending under control.