Many young adults struggle to begin building credit when they’re in college. Oftentimes, you may be barred from certain rentals without a credit score, or have your credit card application denied because you have no credit. It’s a frustrating Catch-22 that you might have faced yourself. But what can you do to help your children avoid it? Here are a few things you can do to help your teenaged child start building credit early.
Co-Sign a Loan or Lease
It’s not uncommon for a teenaged driver to have their own car. But simply buying that car for your child and giving it to them as a gift won’t help them build credit. Instead, consider co-signing on a car loan to help them begin establishing credit. Though this does come with some risk to your own credit, if you believe your child is responsible enough to make those car payments, it can be an excellent introduction into the world of credit building. This best part is, this is something they can do when they’re just 16 or 17 years old, so they don’t need to wait until they’re a legal adult to start building that credit.
Open a Utility Account in Their Name
Here’s another way to build credit without a credit card: You can open a cell phone, internet, or utility account in your child’s name, then sign up to have their payments reported to the credit bureaus. Though this does require them to be 18, it can give their credit score an early boost as they enter adulthood. This is a newer option, and allows on-time payments to have a positive impact on your credit score—rather than only having your utility account reported to the bureaus if you fall behind, as companies did in the past.
Add Them as an Authorized User
If you want to give your child hands-on experience with a credit card from a young age, you can add them to your credit card as an authorized user. You should speak to your card issuer about this first to confirm that your child’s activity will be reported separately to the credit bureaus, but most major issuers will do this. You should also ask about the minimum age to add your child as an authorized user for your card, but in some cases, you can add a child as young as 13 to your account. Talk about getting a head start on credit building!
Of course, building your child’s credit shouldn’t be the only goal with this option: You should also aim to actively teach your child about using a credit card responsibly. Go over their credit card statement each month to discuss their spending and how they can use their credit card responsibly. Discuss what happens if you carry a balance, how interest works, and what the long-term consequences can be if you don’t pay the credit card bill. These concepts can be difficult for a teenager to understand, but they’re vital to financial success as an adult.
Look into Student Cards
When your child enters college and is ready for a credit card of their own, look into student credit cards. This type of credit card is often the first card that many young adults receive, as it doesn’t require you to have existing credit. (Of course, if you’re following the tips above, your child may very well be entering college with a decent credit score.) Your child does need to be over 18, have a proven source of income, and be a U.S. citizen to receive a student credit card.
As mentioned in the previous section, simply signing up for this credit card should not be the end goal here. You want your child to be able to build good credit, and that means using their new credit card responsibly. Be sure that you have detailed discussions with your child about how credit cards work, and the importance of paying off their balance each month. If they use their student card responsibly throughout their college years, they’ll graduate with more than a diploma—they’ll graduate with an excellent credit score that will be a boon to them in the future.
Arm Your Child with Financial Knowledge
Far too few young Americans enter adulthood with sufficient knowledge in managing their own finances. Helping your child build credit early and take on that financial responsibility is essential to helping them succeed as an adult.
At Peter Witts CPA, we care about your financial wellbeing and the financial wellbeing of your family. Reach out to us for guidance on college savings plans, tax planning, and more.