Building a credit history is important for teenagers taking their first steps into financial adulthood. Good credit behavior is often required for many of life’s major financial milestones, including qualifying for a mortgage. What’s more, proof of responsible credit behavior may be required for some of life’s basics, such as opening utility accounts, and qualifying for insurance premiums.
Whitney Lee, a financial advisor with oXYGen Financial, an Atlanta-based financial consulting firm that targets Gen X and Gen Y, points out it’s never too early to teach your teen about responsible credit behavior.
Add your child as an authorized user on your credit card
The Credit Card Act of 2009 makes it more difficult for teens to acquire their own credit cards. Those under 21 either need to prove they have the means to repay their debt or they must have a co-signer who can handle repayment.
Because young adults may benefit from using a credit card responsibly, Lee recommends adding your child as an authorized user on your credit card. “If you both charge responsibly, and pay off your balances, both of you will see the benefits,” she says.
Consider a secured credit card
If you are concerned about your teen spending recklessly as an authorized user, Lee suggests getting a secured credit card. “You basically pre-pay the card with the security deposit, and your teen can start spending up to the limit,” she says. The low credit limit that often comes with a secured card can be a positive: Your child can start using credit and building a history but within manageable spending limits.
Co-sign on an installment loan
Installment loans diversify the types of credit you have. . If you want your teen to begin to manage multiple lines of credit, adding an installment loan may be a good step. In this situation, you can co-sign an auto or other personal loan with your teen, and then supervise the way in which the debt is repaid. Under your guidance, your teen may begin to establish a foundation of responsible credit behavior.
Teach responsible habits
If you are going to add your child as an authorized credit card user or co-sign on a loan, it’s important that you trust your teen. Teach him about budgeting and living within his means. Later, he will need to make on-time payments and avoid overspending. Lee points out that a teen’s credit worthiness may suffer if responsible habits aren’t established early.
“Encourage your child to make small purchases, like a Starbucks run, and pay off the full balance,” says Lee. “Get your teen used to planning ahead for spending and paying off the balance each month.”
Building your teen’s credit before college can be a great way to prepare him to live independently. Helping him allows you to better monitor habits and provide correction as needed. By the time he leaves for college, you will have helped him develop an understanding of how credit works backed by a solid financial foundation.