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Helping older teens build good credit

2023, Kids

While it’s never too early to start teaching children healthy money habits, it’s crucial for young adults to learn the importance of good money management and take the next step toward starting their own credit history.

By starting early, even before graduation and move into their own households, they can access better insurance rates, enjoy a smoother experience renting their first apartment, and, eventually, have an easier time applying for mortgages and other types of personal loans. Here are a few ideas:

1. Start Early.

The minimum age to get a credit card and establish a credit score is 18, but there are things that parents can do to help their children prepare for this milestone. A healthy understanding of the power of money is something that needs to start as soon as children can understand that coins and dollar bills have value.

Allow children to earn and manage their own money. Talk to them about the many things you can do with money from purchasing food, to donating to charity, and investing for their future needs. Play financial games, teach them how to give change for a transaction, show them the household budget, let them pay for birthday and holiday gifts for others, explain the monthly household budget and yearly taxes. Give them a chance to see where money goes.

2. Wants vs needs.

One of the hardest things to teach children (and adults) is the difference between a want and a need. While a want might improve your quality of life (entertainment, travel, household goods), a need is something that is necessary to live and function (food, clothing, shelter). It can be hard for children to discern the difference since many of their needs are already being met by their parents and they don’t see those basics as a need.

Often the purchase choices we make aren’t black and white. Take for instance ‘comfort’. Yes, we need a roof over our heads, but do we need a mansion? Or will a small apartment do? What is realistically affordable? That is subjective based on the individual’s circumstances. Clothing is a need, but do you have to have designer brands? Perhaps if you have a job in the fashion industry, or need to look nice for work it is justified. It’s a balance.

Helping children discern between wants and needs is a hard but it is a necessary skill… as is the skill of delayed gratification. Setting a good example with your own purchases can make a real difference to how they are able to manage money as adults.

3. Teach them the difference between credit and debit.

Since most of us don’t pay with cash money when we make purchases these days, it can be confusing for kids to understand the different ‘plastic card’ we use for gas, groceries, and other payments.

Help them understand that debit cards come directly from your bank account and money you already have. They offer less risk related to contract terms you might enter into with a credit contract with a bank, but they don’t help your credit history and their potential theft and fraud terms are more restrictive from a credit card.

Credit cards on the other hand offer you a ‘loan’ on your purchases which you pay off under their terms contract terms which include high interest rates and fees that if added up can take a long time to pay off. By using a credit card you have the responsibility to pay back the totals on the card. In return these payments are reported to the credit bureaus to build a history that will enable them to get better interest rates on loans in the future.

You also need to talk to them about interest rate accrual on unpaid balances and the legal processes they could face if a credit card payment or loan are defaulted on.

4. Help them start a savings plan.

Once your child turns 12-13 they are ready to have their own bank savings account. They can learn how to manage and track deposits, read bank statements, and its fun to see how excited they get as they watch their money grow. For that age it is appropriate to have them save 50% or more of their income in the bank account and learn how to budget the rest. It’s also a good idea to teach them how to set goals for their savings. Talk to them about future opportunities that are coming, like traveling with high-school groups, purchasing their own phone or car down the road, or possible family vacations to plan for.

Another good idea is to have them start saving for a down payment on their own secured credit card when they turn 18, which will help them with their credit score and future credit needs.

5. Teach them to budget.

One of the best gifts you can give your child is understanding how to budget their money. You can start them young by offering them jobs and an allowance to earn income and then helping them divide their money between savings and spending. As they get older you can show them your household budget, play money games like Life or Monopoly with them, take them to the grocery store and compare prices of items on the grocery list, and help them set goals to attach to their savings.

There are also a few good financial literacy programs for kids. You can review some of the following:

6. Co-sign a loan or lease.

When your student gets ready for their first car or school loan you can co-sign their loan or lease. This will give them the benefit of your credit to receive lower interest rates or a higher loan amount. By co-signing you offer them access to your credit history while they build their own. Just remember that if the child defaults on their payments you are legally responsible to take care of the bill.

7. Add them as an authorized user on a card.

While you must be 18 to get your own credit card, a student can be added to a parent’s card as early as 13-15. By adding your child as an authorized user, they receive the benefit of your credit (if you regularly pay off your card on time). Before you add your child as an authorized user make sure they understand the responsibility they have to use their card wisely as you will also be responsible for their spending. You will also need to make sure that the bank will start reporting use of the card on the child’s own credit history report.

It is a good idea to show them the credit card statement and talk with them every month about their spending habits and responsible card use. You might consider taking out a separate pre-paid credit card with a lower limit rather than putting your child on a high limit standard credit card. This will protect your credit account not only in the case of your child misusing the card, but also if they lose it or the number is compromised.

8. Have them join a voluntary credit reporting program.

Once the child turns 18 have them consider signing up for a program that reports payments on their rent, utility, internet and phone bills to the credit bureaus. Paying these regular bills on time can help them establish a credit score. In addition, since 15% of a score is the length of time in the history report, they can start early to build a good credit score as they prepare to get a car or mortgage loan.

9. Apply for a student credit card.

Once the child turns 18 and has a regular paycheck they can quality for a student credit card. These cards are designed with low credit limits, which are increased over time as the student builds their payment history. Many have lower interest rates, some late-payment forgiveness, and cash back options. It’s important that the student learns to pay off the balances every month on time to benefit from this type of credit builder.

By taking a few simple steps to help prepare your older teen to create a good credit history and manage credit responsibly you can offer them an easier launch when they are ready to take those steps.