If you’ve struggled to manage your credit in the past, you probably want to help your child avoid the same fate. But raising a credit-ready kid is harder than it might seem — many parents are unsure of how to go about preparing their sons and daughters for the world of borrowing.
For a few pointers, take a look at the three strategies below for putting your child on the path to good credit.
1. To help your child build good credit, educate her about responsible credit use
Let’s face facts: Most public schools aren’t doing a good job educating our kids about personal finance. This is why one of the most important things you can do to help your child build good credit is teach her about the fundamentals of responsible credit use.
Specifically, you’ll want to emphasize the importance of making on-time bill payments and avoiding credit card debt. These are the two most powerful things anyone can do to build and maintain good credit. And it’s never too early to start teaching these lessons — as soon as your kids are of school age, it’s a good idea to begin explaining the basics of how money and credit work.
Although you might catch a few eye-rolls every now and then, your kids will thank you later when their credit scores are much higher any of their friends’.
2. Make him the authorized user on your credit card
You also have the option to take steps to help your child build a solid credit score. By making him an authorized user on your credit card, he’ll have the opportunity to benefit from your good habits.
An authorized user relationship works like this: You call your credit card issuer and designate your child as the authorized user on your card. They’ll send a card in the mail with your child’s name on it, and he’ll be able to make purchases with it. However, you’ll be responsible for all the payments. When you make them on time and in full, this positive activity will show up on your child’s credit report as well as your own. As a result, he’ll be building good credit.
This might sound like you’re getting the short end of the stick — your child has the power to swipe as much as he wants with no responsibility for paying. But the benefit is that, as the primary cardholder, you’ll maintain a large degree of control over the account. You can go online any time and see his charges, which generally isn’t the case if you choose to co-sign for a credit card. Plus, if your child uses the card irresponsibly, you can easily remove him as the authorized user.
All in all, this is a relatively low-risk way to help your child get a head start on a great credit score. Just be sure to set up ground rules before you hand over the card.
3. Co-sign her credit card
As a result of the CARD Act of 2009, it’s much harder for people under 21 to get credit cards on their own. The law requires that, unless the applicant has a substantial income, adults under 21 must have a cosigner in order to get a credit card. Consequently, cosigning your child’s first card is another way you can help her get started with building credit.
A cosigner relationship differs from an authorized user relationship in one fundamental way: As the cosigner, you’re only responsible for making payments if the primary user (your child) doesn’t. You’ll have almost no control over the account, and will have to trust your child to use the card responsibly. Otherwise, you’ll be expected to pay on the balance if you don’t want your own credit to suffer. This is something to think about.
No matter which way you choose to go about it, helping your child build good credit is a noble goal. Use the tips above to get started today!
This story first appeared in Voxxi. Father and daughter image via Shutterstock