How to Help Your Teen Build Credit in 7 Easy Steps

Credit is an essential component of adult life. Once your teen grows up and is ready to rent an apartment, buy a car, or take out a mortgage, they’ll need a pretty good credit history. With a better credit history, they will be able to land better interest rates and more favorable terms, which may end up saving them thousands of dollars over their lifetime.

As the parent of a growing teen, there are several ways that you may be able to help your child build a strong credit history that sets them up for success.

1. Educate Your Teen on Credit Card Basics 
Unfortunately, personal finance isn’t always taught in school, so it is a good idea to sit down with your teen and teach them how a credit card works and how building good credit can help them in the future.

Warn your teen about the consequences of poor credit and carrying too much credit card debt. There are also several credit card mistakes that they should learn to avoid:

• Don’t get caught up in the cash, points, or miles game, as it can lead to overspending and debt.
• Available credit isn’t an extra paycheck. If you lean on credit cards to pay for things you can’t afford, your troubles will only worsen.
• If you want something special, save for it. You’ll be able to charge the expense and pay the bill with the money you’ve set aside.
• A missed payment will remain listed on your credit report for seven years and ding your credit rating.
• You may want to spread the payments of an exceptionally costly purchase over time, but don’t let it linger for over a year.

When discussing credit with your teen, be sure to keep things simple and stick to the basics.

2. Try Out a Prepaid Card 
Before you open a credit card for your teen, consider providing them with a prepaid card. A prepaid card will allow them to make purchases while getting used to living within their means.

Because prepaid cards come with fees and cannot build your teen’s history, they should only be used for a short time until your child has demonstrated good financial habits and you believe they are ready for a credit card.

3. Open a Checking Account 
Most banks and credit unions offer checking accounts for minors or students, typically having lower fees than standard accounts. By opening a checking account for your teen, you can help them get used to making deposits and keeping track of how much money they have. When you believe your teen is ready, you can add a debit card that’s linked to their checking account.

If you want to monitor your teen’s account to make sure they are going down the right path, you can become a cosigner on their account. Keep in mind that if you cosign your teen’s checking account, you’ll be responsible if they overdraw it.

4. Sign Your Teen Up for a Credit Card
Once your teen has proven that they are financially responsible, it’ll be time to take the next step and sign them up for their first credit card so they can begin building their credit history.

According to the Credit CARD Act of 2009, anyone under the age of 21 cannot get approved for a credit card without a cosigner or their own source of income. If your child does not work, you will need to cosign their application.

Another solution is to make your teen an authorized user on your credit card. This is the ideal option if your child is still in high school, as it can help them establish a good credit history while they are living with you and you have more control over their actions.

5. Consider Opening a Joint Secured Credit Card 
If you’d like your teen to have their own credit card but are concerned they may ruin their credit or your own, you can open a joint secured credit card. Because secured credit cards require an initial deposit that serves as the credit limit, doing so will limit the amount of credit available on the card and help them prevent overspending. Although secured credit cards usually carry higher fees than traditional cards, they can still help your teen build credit and provide you with some peace of mind. Some secured credit cards will transition cardholders to a standard unsecured credit card if they maintain good financial behavior with the card.

6. Teach Your Teen How to Monitor Their Credit History 
After you have either opened a credit card for your child or added them as an authorized user on your card, you’ll need to teach them how to monitor their own credit history. You may want to show them what your credit report looks like so that they know what to expect.

7. Be a Good Role Model
Children tend to learn from their parents’ behaviors, so it’s essential to set a good example for your high school or college students. Pay your credit cards on time and in full, live within your means, and stay out of debt as much as possible. If your child knows that you practice healthy financial habits, they’ll be more likely to do the same.