Build Your Child's Credit History Early
Hopefully, you're not been the kind of parent (past age 6 or so) to still buy your kid(s) everything they want. Hopefully, you've gone the allowance route, and taught them the basics of how to budget for that Barbie® or Hot Wheels®. After my young daughter got the basic concept, we'd go to Toys 'R Us®, and she'd ask, "How many weeks does this Elmo® cost?" This made her a very young comparison shopper and helped her evaluate how much she really wanted that toy.
But, even if you haven't established a habit of savings over the years, credit is usually a new concept to teens and young adults and requires at least one good seminar, along with education about budgeting - because they will have money coming into their checking account from several possible sources: grandma and grandpa, college grants or loans, allowances, money they earn at jobs, etc. - they need to know how to handle this money and not just party it away in one weekend.
You know your child, so take an honest assessment. Is your child the type who:
- Listens and applies your advice?
- Says: I'm an adult now - you can't tell me what to do.
Either one's okay at this point, because frankly, it's true, they are adults at 18, and you cannot open their mail, snoop into their credit reports or bank accounts, make decisions for them, or force them to be fiscally wise.
So, if you have one of the 90% of kids with attitude #2 who still rolls their eyes at everything you say, advice would be best gained from an expert (as if you're not).
Ways to Establish Credit
There are several methods for establishing your child's credit:
- Open a student checking and savings account as early as possible. Check with your bank about age restrictions. Teach your child how to check their balances and transactions online. Set up automated text alerts when their balance reaches a certain point so that they don't overdraw their account.
- Take your child online to check their free credit score so that they know how to keep tabs on it. (This is often not possible before age 18.)
- Add them as an authorized user on one of your accounts. You may or may not choose to give them the actual card.
- Obtain 2-3 credit cards from different banks that are solely in the child's name. Initially, due to their lack of credit history, these cards may carry higher interest rates, that's why it's vital that they pay off the balance each month, because interest paid is money down the drain. (At this point, if they party up that card to its upper limit - an amount they can't pay off by the due date, go back to the education and dire consequences phase - or just give up on the idea until they come to their senses and ask for help - DON'T YOU DARE HELP PAY THOSE CARDS or they will never understand the true consequences. You might try asking them what they could have bought with the lost money.)
- Make sure your child knows to use the credit cards each month, at least for small amounts, to keep the card active. And, of course, pay them off before the due date. They will know, at this point, that paying on time, and keeping their balance low compared to the credit limit, adds points to their credit record.
- Show them how to check their balances, due dates, and transactions online, and how to dispute invalid charges or credit fraud.
- Explain the importance of cancelling a lost or stolen card immediately and how to get a replacement.
- Help them create an Excel spreadsheet with card names, contact #s, and due dates. Also, have them set up regular monthly calendar alarms on their computer, phone, or whatever they use most, to alert them ahead of time that a payment is due.
As an example, my 20-yr-old college student has a credit score of 761 and is able (and knows how) to bargain with creditors. (For more information on the the many ways banks are trying to buy back our trust by giving money away, see the section The Current Credit Game in my article: Gradualism: How to Improve Your Finances.)
Over her lifetime, if she continues good credit practices, she will save many, many thousands of dollars. Do you suppose I'll get a Thank You?