Solid credit scores take time to build. Everyone has to start somewhere, and as your teenager begins the transition to financial independence, he or she probably doesn't have any credit history.
Lack of credit history can be a hindrance to young adults as they apply for auto loans, shop for interest rates on an auto insurance or go to lease their first apartment. As such, it's important to start building credit as early as possible.
Consider these tips from financial advisers on how to help your teen build credit, while encouraging financial responsibility.
Co-sign for a debit card – but always review the statement. Jay Freeberg, a financial adviser in Garden City, N.Y., said parents who want to help their child build credit should first consider co-signing for a debit card linked to the teenager's bank account. “This will limit the purchases to the amount in the bank account, and it will also give the child some independence on how they are spending their money,” Freeberg says. “I suggest that parents review each monthly statement – at least in the beginning – with the child to discuss the charges, reinforce the link between the actual spending and payment and outline a budget.”
Get your child in the habit of checking their own credit score. This simple step may be more effective than the financial literacy classes many colleges offer, says Elizabeth Pleck, a certified financial planner in Wellesley, Mass. Pleck cited a 2011 study published in the Journal of Family and Economic Issues that looked at the effectiveness of financial literacy courses for University Alabama undergraduates and graduate students. The study found students who took a financial literacy course were no better at managing credit cards than students who didn't take such a class. “Mom or dad should not put much faith in those financial literacy courses so popular on campus,” Pleck says. “My recommended alternative: Tell your child to check their credit score. If they do it, they are interested in figuring out how the financial world works. If they pay no attention, [it's] time to leave the training wheels on.”
Get your teenager a credit card with a small credit limit. If you co-signed to get your teenager a credit card, Laurie Itkin, a financial adviser in La Jolla, Calif., recommends setting a small credit line on the card. Itkin tells teenagers to be patient. "Over time, you will be able to establish a higher line of credit if you demonstrate responsible use of the credit you are given.” Above all, she says it's crucial teenagers pay off their credit card in full each month. “That's the number one thing a child can do to not only establish good credit but also learn good habits now, so they don't get into trouble later,” she says. Itkin suggests credit card newbies start out by making a few small purchases each month on the credit card, such as gas, haircuts or small meals.
Credit has its benefits, but you can have too much of a good thing. “It is important to explain to kids the proper use of credit and when it should be used,” says Russell Francis, a certified financial planner in Beaverton, Ore. Francis says credit can be useful when purchasing high-ticket items like a car. However, he says it's easy for many teenagers to start abusing credit and living outside their means.
While some parents may feel like they can't control their son's or daughter's credit behaviors, attitudes towards financial matters are imprinted when children are young. “Kids clearly follow the parent's actions when it comes to money,” Jay Freeberg says.
If you haven't always managed your credit responsibly yourself, make sure your child understands your slip-ups had consequences. “I recommend that parents share stories of what happened to them when they missed a credit card payment. What fee did they get hit with? How much did the balance grow when interest charges [were] imposed? What did it feel like to see a balance grow, and how hard was it to pay it down?” Itkin says.
Giving teenagers a good understanding of the pros and cons of using credit – and how to use it responsibly – will help them become financially independent.
Amelia Granger is a senior analyst at NerdWallet, a website dedicated to providing unbiased financial information and helping consumers find the best financial advisers, savings accounts, credit cards and other financial products.