Parents want the best for their children, and that includes having a good credit score when the time is right. As a parent, it's important that you set a good financial foundation and teach your child good money management, rather than try to build their credit history for them.
Think of it like doing all of your child's homework for them. When it's time for your child to take a test, they'll fail because they haven't been doing the work themselves. The basic steps are to instill a solid financial foundation, teach how credit works, and then help your kid get hands-on experience with a credit card of their own.
- Making timely payments and limiting debt are the best habits for building a good credit score.
- Parents and guardians can prepare teens for using credit by opening a checking account and modeling good financial habits.
- Parents and guardians can help teens establish credit by sharing a credit card or funding a deposit for a secured credit card.
Start with Banking Basics
Establishing a good banking history can help your child build a strong financial foundation and begin building money management skills. Having a checking account with a debit card helps your child get used to digital spending. Once your teen has a checking account, help them learn how to spend wisely and avoid overdrafts or declined debit card charges.
When you start talking about credit cards, be sure to teach your child how to use it to build credit. Credit cards can seem overwhelming to a teenager, as using it is a brand new experience. Be sure they know what to expect by describing how credit card transactions work, what a billing statement is, and why the payment due date is so important.
Make the distinction between debit and credit cards early. Describe how debit card purchases come out of a bank account, while credit card purchases create a debt balance that has to be repaid.
Model Good Financial Behavior
Children learn by watching the adults around them. Your financial habits, like setting a budget before shopping and avoiding impulse purchases, will play a major role in shaping your teen's financial habits. This is especially true when it comes to credit and building their credit score.
Pay Bills on Time
Paying on time is one of the most important financial habits to demonstrate to your kids. By doing so, you can avoid extra fees and build a good credit score. Show your child your system for tracking payment due dates and ensuring your payments are made on time. Walk your teen through your system for paying bills and explain why it works for you.
Even before your child opens a bank account (or you open one for them), walking them through your own financial habits is a good idea. For example, if you're buying a car and applying for a loan, you can involve them in that process from a basic level, depending on their age and understanding of money.
Keep Balances Low
Maintaining low credit card balances is key for building a good credit score and avoiding too much debt. Show your child your billing statement or online account and discuss your approach to maintaining a low balance, including the timing of your credit card payments.
Go Over Different Types of Accounts
Credit cards are just one type of account that helps build credit scores. Lenders like to see that borrowers have experience with different types of accounts, such as installment loans, auto loans, and mortgages. Consider sharing with your teen your approach to opening new loans and how to determine the right time to apply.
Opening a Bank Account for a Minor
For people under the age of 18, opening a bank account can be a challenge. Bank customers need to sign an agreement to open an account, and contracts signed by minors are complicated. State laws and corporate policies vary, but banks are often reluctant to open accounts for anybody under age 18 unless there’s also an adult on the account.
For that reason, you can open a bank account with a minor. When you're doing so, you have many options, including a custodial account or an education account. Which one you choose will depend on the financial goals you and the minor are trying to reach.
How Teens Can Build Their Credit
There are multiple options for teens who want to build credit, either on their own with a credit card or loan, or with your help. Find a few options, below.
Make Them an Authorized User
As a parent or guardian, you can help jumpstart your teen's credit history even before they’re 18 by adding them as an authorized user on one of your credit card accounts, or even a new account you start just for your teen. An authorized user can be added without a credit check and get the benefit of having the account included on their credit report.
Authorized users can make purchases on the account, but do not have legal responsibility for the debt. As long as you pay your bills on time and keep your balances low, your child’s credit score will benefit. Plus, because you have full control over the account, you can monitor your child's spending habits and remove them from the account if necessary.
Consider Student Loans
Teens who borrow money to go to college can start building their credit with student loans, even if the loans are deferred. Simply having a loan on their credit report helps your teen's credit age and mix. Any payments made toward the loans will help build a positive payment history. That being said, nobody should take out student loans for the sole purpose of building credit.
Help Them Open a Student Credit Card
While teens under the age of 18 can get student loans and become authorized users on a credit card, there are more credit-building options for those 18 and older. If a student can prove they have sufficient income to repay their debts, or they get a co-signer, they can get their own credit card.
Most major credit card issuers offer a student credit card, which functions similarly to a regular credit card but is tailored to their needs. Student credit cards tend to be open to applicants who are new to credit, and the cards have lower credit limits. They are also a good option because many offer rewards and perks that students would benefit from, such as complimentary subscriptions for food delivery services, cash back on ride-share purchases, even statement credits for good grades.
Consider a Credit Builder Loan
With a credit builder loan, the actual loan amount is held in a savings account while your teen makes monthly payments toward the balance. Payments are reported to the credit bureaus, helping your teen build a good credit score. Once the loan is repaid, the savings account is unlocked and the full amount is accessible. Applicants must be at least age 18.
Not all financial institutions offer credit builder loans, but the most common one that does is a credit union. Be sure to check with your credit union if they offer credit builder loans if this is an option for you and your family.
Open a Retail Card
A retail credit card is another solo credit card option that your child can explore. These limited-purpose cards are known for approving applicants with little or no credit history. Credit limits are typically low, around $300 or $500. However, retail credit cards do have high-interest rates. If your child doesn't pay off the balance in full each month, they'll be paying high finance charges.
How Teens Can Monitor Their Credit Score
Six months after your child opens their first credit card or loan, they'll be able to check their credit score for a snapshot of their credit health. There are plenty of free services teens can use, including Credit Karma, Credit Sesame, and CreditWise by Capital One. Some free services may require your teen to be at least 18 years old to sign up for an account.
Teens older than 18 may receive a FICO score each month with their billing statement if they have a credit card with select credit card issuers—including Bank of America, Discover, and Wells Fargo. They won't have access to the free score if they're only an authorized user or joint account holder.
For a full view of their credit information online, teens older than age 13 can access copies of their credit reports from AnnualCreditReport.com. Requests for a minor’s credit report from the three major credit reporting agencies must be made by mail. While they won't receive their credit score—those are not generated until they are 18 years old—they can verify that the information on their credit report is accurate.
According to the Federal Trade Commission, parents should start checking their child's credit report when the individual turns 16.
Frequently Asked Questions (FAQs)
How do you build credit without a credit card?
You can build credit by taking out a loan and paying on time each month. Loan options include a student loan, auto loan, personal loan, or credit builder loan. Short-term loans such as payday loans or pawn loans do not help build credit.