Building credit early on can help establish a credit history for your teenager. It’ll benefit them in the future if they want to apply for a car loan, student loan or credit card. A good credit score can also lead to lower interest rates, which will save them money in the long run, too.
You’re not legally allowed to apply for a credit card till you turn 18. But there are still ways your teen can get a head start on building credit. Here are 7 ways you can help.
Related: How old do you have to be to get a credit card?
How to teach teens about their credit score'?
It’s essential your teen understands how their credit score can affect them in the future. And to stress that maintaining it is an ongoing process.
Start by explaining what a credit score is. Show them how to check their credit reports and educate them on credit card benefits.
When you’re sure they’ve understood the basics, you can move on to exploring ways they can start to build credit now.
1. Explain the benefits of a good credit score
Explain to your teen that a credit score is a 3-digit number between 300 and 850. Banks, credit card companies, and other institutions use your credit score to decide how responsible you are with money. If you have a high score, you’re more likely to get credit. A lower one means you may not. Or if you do, you’ll be charged more interest.
Your credit score is worked out using your credit report. As well as listing your payment history and what debt you have, your credit report holds personal information. Like where you live and work, and if you’ve ever filed for bankruptcy.
2. Show them how to check their credit reports
Generally, a child under 18 won’t have a credit report unless someone’s using their information fraudulently. It’s best to check. You want them to be starting with a clean slate, after all.
For this reason, the Federal Trade Commission recommends you start checking your teen’s credit report when they turn 16. Just in case they’ve been a victim of identity theft. If they have, you’ll have time to correct it before your teen starts applying for jobs, an auto loan or credit.
It’s a good habit to get into anyways. As well as checking the data held about you is correct, you can see what you can do to improve your credit rating.
Show your teen how to check their credit report. (Under federal law you’re allowed a free annual credit report from all three major credit bureaus.) If your child is aged 13 you can check directly (and for free) at annualcreditreport.com to see if a credit report exists. For children under 13, you’ll need to apply by mail to Equifax, TransUnion and Experian.
3. Educate your teen on credit card basics
Used wisely, credit cards can be a great tool for establishing a credit history. But they can cause financial problems if they’re not handled with care.
Before your teen begins building credit, make sure they’re armed with the facts. Start by teaching them the credit card basics everyone needs to know.
Always make payments on time and in full
Make sure your teenager understands that credit is not free money. It’s borrowing, at high-interest rates. Credit card interest rates vary, but on average, it’s between 18.66 and 25.7%. To avoid paying interest it’s vital you make your credit card payments on time. And pay your balance off in full.
But there’s also another reason. Your payment history accounts for 35% of your total credit score. It’s based on whether you make payments on time, how many days past the due date you pay your bills, and how often you miss payments. Every time you miss a payment it has a negative impact on your score.
The greater the number of on-time payments, however, the higher your credit score will be. Emphasize to your teen, to avoid paying interest and lowering your score, pay your credit card bill on time every time.
Only use a small amount of your available credit
How much you owe in total makes up 30% of your credit score. This is based on the number and type of accounts you have, the money you owe and the amount of credit you have available to use.
High balances or maxed-out credit cards lower your credit score. Smaller balances, on the other hand, may increase your score, as long as you pay your bill on time.
It’s best to keep your balance to available credit ratio low — to 30% or less. If your credit limit is $1,200, let’s say, keep your balance below $360. Anything above that can reduce your score.
Don’t apply for multiple credit cards at once
Every time you apply for a credit card, the issuer pulls your credit report. This can hurt your credit score.
Explain to your teen it’s best to limit the number of credit card applications you make and apply at intervals of six months. You should also only apply if you’re sure your application will be approved.
Don’t have too many credit cards
Having too many credit cards can also impact your credit score. And not in a good way. Even if your cards have zero balances, if there are no payments to see, credit bureaus have nothing to work with.
If you do have more than one credit card, make sure you spend small amounts on it regularly. And pay your bill in full, on time.
4. Lead by example
Children are like sponges. You might think your teen’s not paying attention, but they absorb a lot by watching the way you behave. So lead by example. Model the financial behavior you want them to copy.
Try showing them your credit card bill. Talk about how you account for this money in your monthly budget. You could also discuss why you picked one credit card over another.
Does yours come with perks like airline miles, travel insurance or a gym membership? Explain the points system and how these rewards work for your teen. That way they’ll be able to make a more informed choice when they’re older.
If you’ve made mistakes in the past, share them. Your teenager will make their own mistakes, for sure, and hopefully, learn from them. But sharing your own stories may make them feel more comfortable coming to you for money advice in the future.
5. Research student and secured cards
If your teenager is 18 or over they can apply for a secured credit card. It’s a great credit-building option for teens as you don’t need a credit history to get one.
A secured credit card is like a prepaid credit card. To open one, you have to pay in money up to your credit limit. You can only spend up to your limit. And you’ll get charged interest if you don’t pay off the balance in full every month.
6. Add them to your credit card account
Teens under 18 can be added to an adult’s credit card account as an authorized user. In fact, most card issuers will let you add your child to your account from the age of 13.
It’s a great way for them to start building a credit history, but there are risks. If your child overspends, you’ll be liable for what’s owed and could see your own credit score lowered as a result.
7. Open a checking account
A checking account is a great way to give your teen hands-on banking experience. It’ll provide them with an opportunity to develop good money-management skills. And get them used to spending with a debit card.
Although your teenager can’t have their own bank account until they reach 18, most banks allow an adult to open a joint checking account with a child. They will have to be at least 13 to have access to the funds in the account, however.
Once you’ve opened a bank account with your child, help them learn to be smart about their spending. Explain the impact of overdrafts and declined debit card charges.
It’ll prepare them to be responsible with their money, especially if they have a credit card later in life. Explain the impact of overdrafts and declined debit card charges. You might want to discuss what their card can be used for and set a cap on their spending each month. Remember, as the adult on the account, you’re liable for any overspending.
How GoHenry can help teach your teen about credit
There is an alternative to a bank account for your teen. One that helps them learn about money through their own experience in a safe, secure way.
GoHenry is a pre-paid debit card and app for kids and teens from 6-18. It comes with a companion app for parents.
So while your teenager gets a chance to flex their financial muscles, you get peace of mind. You get notified in real-time every time they make a purchase, set spending limits and flexible parental controls. And because GoHenry is a pre-paid debit card, there’s no danger of them overspending.
92% of parents say their teens are more money-confident thanks to GoHenry.
