When I was a college student, I was bombarded by solicitors who wanted me to apply for a credit card. I thought I was being smart by declining them all because I didn’t want to get into a bad habit of charging expenses that I wouldn’t be able to pay off. But the summer after I graduated, I was headed to Europe and I couldn’t find a company that offered me a line of credit because I didn’t have any credit history.
Eventually, I was able to get my first credit card, which had a very low balance and a very high interest rate, and I built my credit history from there. Now, as the mom of a teenager, I want to understand the best ways for her to establish her own credit, so she doesn’t come across the same challenges.
I connected with a few experts and got the following great advice.
Teach teens why building a credit history is so important
Good credit history and a strong credit score can open financial doors that help people get a house, a car or even a cellphone.
“Credit history can play a part in getting the cellphone you want and having the service [plan] you think you need,” says Rod Griffin, senior director of consumer education and advocacy for Experian. “It can play a part in leasing an apartment. It can play a part in signing up for the utilities for that apartment… Your credit history could play a part in the job you get, especially [if you’re] managing a company’s money in some way. [Strong credit history] is going to be really important in establishing your life and being financially successful.”
The sooner teens understand that the responsible use of credit can benefit them and help them reach their financial goals in life, the better.
Start your child’s credit history while they’re young
Building a solid credit foundation early in your child’s life is crucial, and there are several ways to achieve this. For example, if a teen is responsible, parents can add their children as authorized users on one of their credit cards, says Jeanne Kelly, credit coach and founder of The Kelly Group Credit Coaching, who used this strategy with her own daughter when she was 16, had a job at the local library and was paying for gas to drive herself there. She added her daughter as an authorized user on a credit card Kelly didn’t use often.
“The bill would come in, and I was able to teach her [to] look at the receipts,” says Kelly. “Does this match? Is everything looking right? OK, let’s pay it in full. She would give me the money.”
Keep in mind that a debit card isn’t going to act like a credit card, she says. You need to make sure the charges and payments show up on your teen’s credit history.
Some companies offer starter cards, explains Griffin. The interest rate won’t be great, and the limit will be low, but they are easier to get when someone doesn’t have established credit. “[In the beginning], it’s good to have one or two [credit cards] and then to use them to make a small purchase and pay them in full.”
Another option is to use Experian’s credit match program. Your odds of getting approved for the credit cards they recommend are greater because they match your credit profile to qualifying criteria, explains Kelly.
Teach teens key credit terms
Teach teens to pay off their balance in full every month so they know to charge only what they can afford. Only paying the minimum balance due will keep the credit card in good standing, but you will still accrue interest, which can get colossally expensive.
Maintaining a high credit utilization rate can negatively impact a credit score. “High balances on that card are going to wreck your credit scores because the closer you are to the credit limit, the more risk there is that you won’t repay it, which causes your scores to go down,” explains Griffin.
Be patient
Keep in mind that, in most cases, it typically takes anywhere from three to six months for a new card to be included in credit scores, says Griffin. Staying patient is important, as is understanding that there are no quick fixes when it comes to the health of your credit.
“It’s about your history… and the way you manage credit.… [Credit history] scores are looking at behavior over time, not just what you do today,” says Griffin.
At the end of the day, starting early and slowly helping your teen build a solid credit history is key. Teach them why it’s essential to be responsible and always pay off their debt in full. Explain the end goal and the importance of being patient, which will help them build strong credit for a lifetime of financial success.
Photo by Miljan Zivkovic/Shutterstock
