HELPING YOUR CHILD BUILD A POSITIVE CREDIT HISTORY

When your child was little, you showed him how to brush his teeth. When he was older, you showed him how to tie his shoes. There is so much you have taught your child over the years, but one lesson is often overlooked. Have you taught your child to be financially savvy?

If the Millennials are any indication of a young adult’s financial preparedness – you may need to teach them a little more. According to a survey conducted by Lend EDU, Millenials do not have a sold understanding of how credit card usage affects their overall credit rating.1 In fact, many don’t understand how late payments, high balances and multiple open accounts can negatively affect their credit score. As a result, a Nasdaq 2014 article reported that young adults born in the early 1980s had about $5,689 more in credit card debt than their parents at the same age.2

A child’s financial education is something parents often don’t think about. Since young adults generally start building their credit histories after they’ve become independent, parents don’t have much of an influence over this aspect of their lives. Until, that is, Junior calls asking for money to bail him out of a financial bind…

It doesn’t have to be this way. Junior will be less likely to call asking for money later in life if you help him begin to build a solid credit history early. This doesn’t mean you should get your 5th grader a credit card and access to your Amazon account. Before even thinking about credit, there’s some frontloading Junior will need. The following lists 5 ways you can help your child begin to build a healthy credit history.

#1 Teach the Value of Money

Children usually have a very poor understanding of the value of money, especially if they are accustomed to people buying them the things that they want. Therefore, the first lesson in helping your child build a healthy credit history starts with the basics: earning money.

You can do this by giving your child an allowance. The amount of money your child earns doesn’t have to be much – just enough for your child to be able to practice spending and saving. You can increase his allowance as he gets older and takes on more chores, or you can incentivize him to perform more chores by offering bonuses.

Find a cute wallet or other item that allows your child to carry his money with him. Then, when you’re at the store and he wants a toy or a treat, show him how to pay for it. This will help him develop a sense of ownership and responsibility as he sees his hard-earned money dwindling away!

#2 Teach Budgeting

According to Tim Chen, the CEO of NerdWallet, it’s important to teach your child how to budget.3 Your child has already started to understand the value of money and how quickly it can be spent, now he needs to practice saving it.

If your child expresses interest in an item that cannot be purchased with his current funds, help him create a budget. Write the cost of the object at the top of the page. Then help him calculate how long it will take him to earn that amount if he saves his allowance. This simple activity helps your child develop so many important financial skills: calculations, planning, and patience to reach long-term goals. If your child has a difficult time saving, don’t worry. There have been many studies that show just how difficult it is for younger children to delay- gratification. Just look up the Stanford Marshmallow Experiment.

#3 Open a Bank Account

When your child starts to earn more money than his piggy bank can hold, consider opening a savings account. Savings and checking accounts are considered the first step in establishing a financial footprint. Neither account counts toward your credit score, but lenders view a bank accounts as a sign of responsibility. Start with a savings account, and then open a checking account when your child is ready.

To open either type of account, a consumer must be 18, so you’ll need to act as a cosigner. Depending on the bank, customers must also show identification– usually a social security card or passport for minors. Banks will also require a minimum deposit– anywhere from $25-$200.

The next step is to allow your child to start using the debit card for his checking account. A debit card helps teens practice using plastic like a credit card, but there’s a limit so they cannot overcharge to an extreme or without penalty.

#4 Establish Credit

The next step in entering the world of credit is, well, getting credit.

Teenagers cannot sign up for a credit card on their own – they must be 18 and show proof of income. So, if your child is under 18, you’ll need to help her out. The following lists some ideas for establishing credit safely.

Add Them to Your Account

When a customer adds an authorized user or joint-user to an account, oftentimes whatever history is attached to that account gets copied to the new user’s credit history. Therefore, the easiest way to establish a credit history for your child is to add them to your account. It’s a risky step to take since your child’s activity will influence your score and vice versa. If you’re worried about your child’s self-control, you don’t need to let your child have access to your credit card. The association should be enough. Check with your credit card before adding your child to the account since terms will vary.

Secure Credit Cards

Finally, secure credit cards are like hybrid ATM- credit cards. Consumers are required to put money on the card – in the form of a down payment or security deposit– before they can use it for purchases. Available credit line varies by card, and some will only allow you to use what you have put on the card up front – like an ATM card. However, because this is a credit card and not an ATM card, using it will count toward your child’s credit history. Most credit card companies offer secure credit cards, just make sure you research rates, fees and restrictions before choosing one.

#5 Diversify Debt

Once your child has established a solid credit history, he’s on the way to earning a sold credit score. But having a credit history with only revolving credit (like credit cards) isn’t enough for a great credit score, even if you’ve never had a delinquent payment. Credit scores improve when a person has a solid history of handling both revolving and installment debt.

The most common installment loan for a new borrower, and a teenager, is an auto loan. If this isn’t an option, you can also help him take out a personal loan. Regardless of who is going to pay for the loan, it should be in both your names. Again, if you are handing over the bills to your child to take care of, you will probably need to monitor the payments. You won’t feel as good helping your child develop a healthy credit history if he ruins yours!