Kids and Credit
When your kids grow up they will inevitably have their own credit score. By educating your kids early on the importance of credit you may be setting them up for financial success. So before you go ahead and hand over the plastic consider the following.
Educate your children on credit, start with the basics: What does credit mean? One way of teaching your child about a credit score is to compare it to a report card. The marks on your “report card” shows how well you did repaying everyone back the money you borrowed. Let your child view the negative and positives of your report, this will help them get a better of understanding of how credit works and how they should manage their own credit. Explain the affects credit may potentially have on your life, from the car you drive to the house you live in. Also teaching your child on how to protect their private information like SSN, phone number and address will be important when learning about credit.
Another great education tool about credit would be to show how credit is used in real life situations. For example, if you decide to take your son or daughter out to dinner explain the process of what happens once you pay the bill on your credit card; the restaurant receives the money for your meal through the bank, in return the bank sends you the bill each month, resulting in you paying for the bill. Also, now would be a great time to describe what may happen if you do not pay the bill the bank sends you each month.
Now that you have educated your child on the basics of credit and how important it is to manage credit wisely, it may be time to consider making them an authorized user on one of your good standing credit cards. You may want to add your child to one of your accounts that has been opened for a length of time, has good payment history, and has a low utilization percentage (ideally below 25%). Before giving your child your credit card it is important to tell them when and how the credit card should be used. Will they be allowed to go to the mall with the credit card or is it only for emergencies? Also, discuss spending limits and the consequences of going over the agreed amount. Communications is key.
However, if your main goal is to only build your child’s credit score then consider making them an authorized user on a credit card without handing over the card. If you still do not feel comfortable with supplying your child with a credit card one idea is to put your child’s name on utility bill that is always paid on time every month.
Another option you have to help build your child’s credit score is a secured credit card. With a secured credit card you are able to put down a deposit amount usually between $200-$500. This deposit becomes almost like a security deposit on the credit card. Just like a security deposit if your child handles their account properly they will receive the deposit back with some interest. A secured credit card will allow your child’s credit to grow while also teaching them how to manage their credit wisely. It is always a good idea to help co-manage an account while your child is learning the basics of finances. This way you can help protect them from landing in any bad financial situations.
Lastly, once your child has finally established credit it may be a good idea to show them their own credit score. You can use the free financial tool SavvyMoney® to show your child how he or she has built his credit and how early or late payments have affected their credit.