Parents, Pay Attention: Here’s the Best Way To Build Your Gen Z Kid’s Credit
Having good credit means more than just meeting qualification requirements for a favorable interest rate on a car loan or a mortgage. It impacts everyday things you do — without you even knowing it.
Your credit score is tabulated based on the information contained in your credit reports. The higher the score, the better credit risk you are. As such, you can qualify for lower annual percentage rates on your credit cards, receive lower premiums on your home or car insurance, have access to higher lines of credit, receive easier approval when renting an apartment or getting utilities for your new place, or even signing up for a cellphone plan.
It’s crucial for young people to build good credit — and maintain it — for their financial futures. And that’s where parents come in.
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As a parent of a tween, teen or even a young adult, you can help your kids to build the good credit they’ll need throughout their lifetime. To make the most impact, financial experts say to start early.
“Teaching them about credit will empower them to make better decisions in the future and help them continue to build and maintain a good credit score when they’re adults, potentially saving them thousands of dollars throughout their lives,” said Ben Arbov, the founder and CEO of Greatest Gift, a financial gifting platform to help children save money for the long term.
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Start the Money Discussions Early
If you didn’t talk to your children when they were little about money using well-worn sayings such as, “A penny saved is a penny earned,” it isn’t too late.
By middle school, kids understand the difference between needs and wants. Share with them an overview of your monthly budget to let them see the choices you have to make and explain why you’re saving for that new dishwasher you need instead of just going to the appliance store and pulling out your credit card — and then paying interest on that dishwasher.
Middle school is a good time to entrust your child with a prepaid debit card — ask Grandma to give your child that for the holidays instead of the typical $100 bill. That way, children can experience the use of a card for an online purchase or at the register in a risk-free way. At the same time, you can explain that as your credit cards have a credit limit, they have one, too — $100. With the prepaid card, there is no chance of overspending as with a credit card. It simply will run out of money.
By high school, and under your watchful eye, your kids can be introduced to a credit card of their own that will help to build credit. You can help your child in one of two ways — once you’ve explained the power and the pitfalls of a credit card.
“Children between the ages of 14 and 18 are ready for talks regarding debt, investing, loans and credit. Seventeen and 18-year-olds are preparing to start college, and may already have their mailboxes filling up with credit card offers,” said David Jones, director of estate strategy at Bailard, a wealth and asset manager based in the Bay Area. “Giving advice for navigating student loans and credit cards will help them as they make vital decisions regarding going to college or general budgeting as they ease into independence. Understanding good and bad debt while implementing credit into their bank accounts and wallets will positively influence how they spend, and even how they invest, their money.”
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The First Credit Card
The first way to help your child build credit is to add your child to your credit card as an authorized user. Since not every issuer reports authorized users’ credit history to the credit bureaus, make sure yours does before taking this step.
By doing so, your child can benefit from your good credit. As you use your card and pay it off in full or make on-time monthly payments, your authorized user will benefit from your good use of credit, and it will be reflected on a credit report and in a credit score.
TIP: Some credit card issuers have no minimum age requirement, so you could make your child an authorized user while the little one is still in diapers. “My boyfriend’s parents put him on their credit card as a baby,” said Sequoia Craig, a marketing consultant and web designer in Northern California. “His credit score was excellent before he even knew about it because of the length of credit.”
But this isn’t just about your responsible credit habits; you want to teach good credit habits, too. Set rules about credit card use in relation to your child’s ability to pay, based on earnings from babysitting, lawn mowing, retail jobs and the like. Start small with something manageable — your teen’s Netflix subscription, for example — and increase the limit you set on usage as you see a steady, on-time payment history.
This isn’t the best option for your family if you might struggle to pay your bill or if you think your teen could be irresponsible with the credit card you provide.
“The traditional way to help a child build their credit early on is to give them a credit card and develop their credit off of the parent’s credit,” agreed Darren Nix, the founder of Steadily, a landlord insurance company. “The problem with this method is either the kid and the parent will end up with good credit or both will have bad credit. There is no combination or middle ground.”
You can take your credit out of the mix by helping your teen to obtain a secured credit card — one that’s ideal for helping to build credit from scratch. While it functions like a regular credit card, it requires a cash deposit to open the account. If your child puts $500 down as a deposit, $500 is the credit limit. The bank can use the deposit to pay off your balance if the cardholder defaults.
Since the interest typically is higher on secured cards, parents should stress the need to pay off the balance each month and by the due date. After several months of good payment history, call the issuer and ask to shift to an unsecured card. The cardholder will get the deposit back and obtain a lower interest rate on the reissued card.
“Ideally, they should be taught to make small purchases they can cover — something like gas,” said Jake Hill, the CEO of DebtHammer. “Then they pay it off on time and it’s favorably reported for their credit score.”
And finally, don’t just focus on credit cards, said Clemy Jajati, the CEO of Thor Capital Group.
“In addition to adding a teenager to a credit card as an authorized user, you can also help them build credit by co-signing a car loan for them,” Jajati said. “Even if they aren’t the ones making actual payments, the loan will still show up in their credit history. Keep in mind, however, that some lenders will not accept a minor as a borrower, even if you are willing to co-sign.
“A good credit score comes down to a combination of variables, but one that is often overlooked is your credit mix. You can help your child build that mix by searching out and having their name on different types of loans.”
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