8 Tips for Parents to Help their Children Build Good Credit Early

Children and credit may not seem like they go together, but parents can take some proactive steps to help their kids establish good credit early. To find out how, Select spoke with three financial experts.

While it’s never “too early” to start talking with your kids about the importance of money management, it is crucial for young adults to establish their credit history early. Doing so allows them to access better insurance rates when they’re older, enjoy a smoother experience renting an apartment or house, and have an easier time applying for mortgages and other types of loans down the road.

Although the minimum age to get a credit card and establish credit is 18, parents can do many things to help their children prepare for this benchmark. It’s wholly possible to build credit as a minor. experts who shared To ensure your child knows how best to use credit, Select spoke with three financial Credit Wise

1. Start early

You can teach your young adult child a few simple tricks about maintaining excellent credit, such as always paying their bill on time, spending below their means and not opening more accounts than they can comfortably manage. But the best way to ensure they have good credit habits is to educate them early on about how the credit game works.

A study found that children as young as three years old start to develop their money behaviors, which are mostly solidified by age seven. Tim Sheehan, CEO & co-founder of Greenlight and a father, says teaching kids about earning money through simple household chores is one way to set them on the right track early in life.

CFP Mac Gardner’s children’s book “The Four Money Bears” is not only a great story, but it also teaches kids good money habits. In the book, one of the characters named Spender Bear gets into trouble when all he does is spend his money on what he wants. To help him, the other three bears teach him how to budget by including saving, investing and donating in his spending plan.

“Gardner explains that ‘Spender Bear is high on life until he overspends and loses everything,'” By presenting these sorts of problems to children during story time, it prevents them from having to be told “no” everytime they want something at the store. Additionally, this might make them more invested in solving the issues of characters they come to love.

2. It’s important for children to understand the difference between a debit card and credit card.

Children learn by example, so when they see you using free debit cards for teens, it’s not difficult for them to understand that it operates similarly to cash. Although this is true, students should be taught the difference between credit and debit before they use either one. A credit card is essentially money that has been borrowed.

Sheehan explains that although having a debit card doesn’t help build credit, the responsible habits learned from using a debit card can be applied to more complex topics like credit cards and borrowing.A plethora of banks provide debit cards specifically for kids and adolescents. For example, if you have a checking account with Chase, you can open a Chase First BankingSM account and receive a debit card for ages 6 to 17.

3. Incentivize saving

According to Sheehan, rewarding your children for completing household tasks is more successful when you incentivize saving. He created the Greenlight app to assist parents in teaching their kids how to use a debit card responsibly (which reflects onto credit cards later, says Sheehan).

According to Sheehan, the Greenlight app can help you establish weekly chores and give your child a corresponding allowance.

In addition to the parent-paid interest program, Greenlight also offers a rewards system that lets parents send interest disbursements from their checking accounts to their kids. So far, 1 million parents and kids have saved approximately $25 million collectively, which comes out to around $25 per kid on average. According to Sheehan, the parents who use this feature see their kids saving more money. On top of that, these kids are currently earning an average annual percentage yield (APY) of 18% from what is essentially their own personal “bank” setup by their generous parents.

Did you know that as your kids grow older, they will come to realize that money can not only make you money but also cost you? Lenders charge interest on the loans they give out.

4. A secured credit card is an excellent way to help them save early.

If your 18-year-old is interested in opening their first credit card, you might want to suggest they open a secured credit card.In certain cases, the money you have in an account at a bank can be used to help qualify for a secured credit card.

For example, if your teen begins a savings account at the Digital Federal Credit Union (DCU), they could put away money for a deposit on a DCU Visa® Platinum Secured Credit Card.

According to DCU’s website:

This credit card is a great way to establish or improve your credit history. By letting you borrow against your DCU savings account, this card gives you all the benefits of DCU’s Visa Platinum Credit Card.

By using this card, parents can avoid paying cash advance fees, and they have the option of overdraft protection. This means that they can link a credit card account to their DCU checking account so their teenager will not spend more money than what is available in the account. Additionally, Rod Griffin – director of public education and advocacy for Experian – notes that this strategy accomplishes two things: it teaches teenagers about handling credit cards responsibly and encourages good saving habits from a young age.

As Griffin explained, if individuals don’t pay their credit card bill on time, “their savings account will be depleted and they will receive a lower credit score.” However, if done correctly, somebody can keep growing their savings while also developing good credit.

The Discover it® Secured Credit Card is a great option for parents looking to help their children build credit. What sets this card apart from others is that Discover will automatically review account holders after seven months to determine whether they are eligible for an unsecured line of credit. In addition, the card offers cash back rewards and a welcome bonus.

5. Co-sign a loan or a lease

According to Griffin, aiding a 16 or 17 year old in securing a loan for a used car can help build their credit.

Although this method may have certain risks associated with your personal credit score, if you believe your teenager can be responsible enough to make car loan payments on time, it might be a great opportunity for them to establish credit without having to open a new credit card.

If your child is looking to move out and get their first apartment, you can help them by cosigning the lease. Additionally, they can ask their landlord or property manager to report their rent payments with Experian RentBureau so that their credit score starts off high.

If you’re looking to help your child build their credit score, an auto loan, student loan or other installment loan could do the trick. Just be sure to check with your state’s laws on whether children under 18 can co-sign a loan, and when the loans will appear on a credit report. Most often, you can go to your lender for specific answers to these questions.

6. To add your child as an authorized user:

Help your child build credit before they even become a teenager by adding them as an authorized user on your credit card. Most issuers allow children as young as thirteen to fifteen years old to qualify, while some have no minimum age requirement whatsoever (you can read about the minimum ages for each issuer here).

Before you put your youngster on your card, contact your credit company to make sure their activity will appear on the credit reports (most large issuers already do this). If not, it won’t help them develop a good credit history.

By making someone an authorized user on your credit card account, they can make online and in-person purchases without you present. Additionally, many cards extend the same perks to authorized users as the primary cardholder—things like free airport lounge access. And with some cards, there’s no charge at all to add an authorized user.

However, education doesn’t have to stop there. Griffin  highly suggests that parents review credit card statements with their teenage children so they can learn how to use a credit card responsibly.

By the end of each month, Teachman urges parents to go through their child’s billing statement with them. He emphasizes the importance of repayment and the future consequences that could come from not paying off a bill, such as damaged credit.

“Making a financial decision can be tough because money is connected to our emotions,” Griffin says. However, you should only add an authorized user if you completely trust their spending habits and ability to handle the responsibility. Also note that your credit score may be at risk when adding an authorized user.

7. Have each team member list every type of credit they can think of.

A crucial element in a person’s credit score is their borrowing history and financial track record, which can make it challenging for young adults to establish credit.

There is however a new solution for this: Once they turn 18, your child can open up a cell phone, internet or utility account under their name and sign up to have their payments reported back to the credit bureaus.With services like *Experian Boost®, they are able to give the bureaus access to view their “telecom and utility bills” Griffin states. An individual’s payment history for internet, cable, cell phone, and utility accounts (e.g., gas, electric, water) from the last two years will appear on their credit report once they agree to the service.

Positive on-time payments to utility and cable companies can now be reported to credit bureaus, which helps improve your credit score. According to Griffin, this wasn’t always the case–in the past, these companies would only report when an account fell into delinquency. However, people who have their rent payments tracked by Experian have seen their credit scores increase or become scorable for the first time.”

8. You should encourage them to apply for a student card.

A student credit card is generally the first credit card that young adults open. This type of credit card allows college students who are enrolled in either a two-year or four-year institution to begin building their credit score. Some cards will even let them earn rewards or receive benefits tailored specifically for students. In order to apply for a student credit card, your child must be over 18 years old and have some form of income stream (part-time job, allowance, etc.).Additionally, most companies require that the applicant is also a U.S. citizen; though there are some options available for international students as well.

The Discover it® Student chrome, built especially for undergraduates, has an incredible rewards system. If you often buy gas or eat out, then this card is perfect for you–enjoy 2% cash back at participating gas stations and restaurants each quarter (up to $1,000 in combined purchases), then 1%.With this credit card, you’ll automatically earn 1% cash back on all of your other regular purchases.

Bottom line

“Credit cards can be a tough topic for parents to broach with their children,” Sheehan told Select. It’s beneficial to begin early and reward positive actions that will establish their credit when they come of age. Good values usually start at a young age, sometimes even before kids are old enough to drive.

Many experts agree that children and teenagers should make mistakes while they are still young. This is because they will be less expensive as adults, and potentially even families to support.