If you're a parent of a teen or young adult, you might be wondering why you should care about your child's credit score. After all, they're still young and probably not thinking about buying a car or a house anytime soon, right? Wrong! Building a good credit score takes time, and the earlier your child starts, the better off they'll be in the long run.
First things first, what is a credit score and why is it important?
A credit score is a three-digit number that represents your creditworthiness. It tells lenders how likely you are to repay your debts on time. The higher your credit score, the more likely you are to be approved for loans, credit cards, and other forms of credit. A good credit score can also lead to lower interest rates and better terms on loans, which can save you a lot of money in the long run.
Typically, only people age 18+ have a credit score, but it is possible for minors to have a credit report if the minor was added as an authorized signer an adult’s account or if their identity was stolen and used to open an account (learn more about requesting your child’s credit history later in this article).
So why should your teen start building their credit score now? For starters, it takes time to build a good credit score. Creditors want to see a long history of responsible credit use before they'll extend credit to someone. By starting early, your teen will have more time to establish a good credit history, which will make it easier for them to get approved for loans and credit cards in the future.
Another reason to start discussing credit early is to avoid the pitfalls of bad credit. If your teen starts using credit irresponsibly or fails to pay their bills on time, it can have a negative impact on their credit score. This can make it harder for them to get approved for credit in the future and can even impact their ability to get a job or rent an apartment. By teaching your teen good financial habits now, you can help them avoid negatively impacting on their credit score as they begin taking control of their own finances.
So how can you help your teen build their credit score? Here are a few tips to get started:
Do: Add your teen as an authorized user on your credit card.
This is one of the easiest ways to help your teen start building credit. As an authorized user, your teen will be able to use your credit card and the activity may be reported to the credit bureaus under their name. Just make sure you monitor their spending closely and set clear boundaries on what they can and cannot use the card for. *Some credit issuers do not report the payment history of authorized signers to the credit bureaus, so it’s a good question to ask your credit card company.
Don't: Co-sign for a loan or credit card for your teen.
While co-signing may seem like a good way to help your 18+ teen establish credit, it can be risky for both parties involved. If your teen defaults on the loan or credit card, you'll be responsible for the debt. Instead, encourage your teen to build their credit slowly and responsibly.
Do: Help your young adult open a secured credit card.
A secured credit card requires a deposit, which serves as collateral for the credit limit. This is a good option for young adults who don't have any credit history yet. Just make sure your teen understands the importance of paying their bills on time and keeping their credit utilization low.
Don't: Let your child open too many credit cards at once.
While having multiple credit cards can help build credit, it can also lead to overspending and debt if not managed properly. Encourage your teen to start with one or two credit cards and build from there.
Do: Teach your teen about responsible credit use.
Make sure they understand the importance of paying their bills on time, keeping their credit utilization low, and not using credit to buy things they can't afford. This will help them establish good habits early on and avoid the pitfalls of bad credit.
Don't: Ignore your teen's credit score.
Even if your teen is not planning on making any big purchases anytime soon, it's important to keep an eye on their credit score and make sure they are building a strong credit history. Together, you can review their credit history by requesting a free credit report annually from each of the three credit bureaus – Equifax, Experian and TransUnion.
Do: Teach your teen about of the basics of lending.
Teens and college students who may be in need of quick cash but don’t have an established credit score are vulnerable to being taken advantage by companies that offer traditional banking alternatives – such as payday loans, title loans, check cashing services and other high-interest loans. Make sure your teen understands the risks associated with services and how high fees, interest rates and other hidden costs can affect their financial obligations.
Don't: Let your teen fall for marketing schemes.
Some credit companies may target college students and even visit college campuses to entice students to sign up for their cards and lending products. They may offer perks and other benefits to entice their target audience to apply. Encourage your teen to research and compare different credit cards, as well as read the fine print for hidden fees and high interest rates before making a decision.
By following these dos and don'ts, you can help your teen build a strong credit score that will serve them well in the future. Remember, building credit takes time and patience, but the rewards are worth it.