Wednesday, June 18, 2014

How to Build Your Teen's Credit

Help your teen build credit
One of the smartest financial moves you can make is to help build your teen's credit. You're not only teaching your children good old fashioned responsibility, you're giving them a foundation they're going to need. Too many parents see no point in building credit for their children, but one day soon those kids are going to turn 18 and strike out on their own. Regardless of whether your teen heads to college or into the workforce, having a developed credit history gives him a significant advantage over other kids his age.

Why You Should Build Credit For Your Teens

Before I tell you how to build credit for your teen, I have to tell you why you should. You know, really sell you on the idea. If you're already in my camp and don't need to be preached at, feel free to skip to the next section.

Guess what happens when a child leaves home and finds himself out in the great big real world? He needs things. Sure, he may have a job, but his part-time college job or starting position in the company he hopes for a career in isn't going to pay him enough to get the things he needs. Take a car, for example. Let's say your child wants to buy a car. He needs to finance it and make payments. Without an established credit history guess who he's going to turn to to co-sign that loan? You. You love your child, you want to help but co-signing anything is accepting a risk that carries no rewards, you get me?

If you build your kid's credit ahead of time, he won't need to lean on you quite so much when he's finally out of his own. This doesn't just spare you the headache of having to worry that your much-loved offspring's inexperience will leave a few black marks on your credit before he finds his feet financially. It also gives him a sense of maturity and responsibility. He'll be proud of the fact that he can stand on his own--and you will too.

How to Build Your Teen's Credit Score

When you're building up bad credit, you have a variety of options. When you're building your teen's credit, you really have only one: a credit card. Wait. Stop. I can hear you saying to yourself, "But Lee, no credit card company is going to give a minor with no credit history a credit card." And you'd be right. But a credit card company isn't going to give your teenager his first credit-building card: you are.

Most credit card companies allow cardholders to add their children to their accounts as "authorized users."
Build your teen's credit with an authorized user card.
An authorized user isn't a full cardholder and can't make changes to the account like a joint cardholder can, but they do receive a card of their own connected to the primary cardholder's account. Most credit card companies also report the primary cardholder's account tradeline on the authorized user's credit report (Most, but not all--make sure your credit card company reports authorized users. If they don't, adding your child to your account is pointless).

This provides you with a golden opportunity to help your teen build credit. Provided your account is in good standing, your child will have a positive credit report as soon as the credit card company reports the new authorized user account to the credit bureaus.

Warning: Don't Accidentally Destroy Your Teen's Credit Scores

No one is perfect and circumstances can change. If you suddenly find yourself unable to make the payments on your credit card, you've got to contact the credit card company and remove your teen as an authorized user before you default. Missing a payment by a few days will leave you with a fee but no credit damage. Being 30, 60 or 90 days' late on your credit card payment is devastating for your credit scores. If your teen remains an authorized user on your credit card account when that occurs, his credit will suffer as a result of your financial mistakes.

If you decide to strategically default--that is, you make a conscious decision to stop paying your credit card debt rather than merely forgetting--you can and should remove your child as an authorized user first. The tradeline will still remain on your teen's credit report, but the credit card company will no longer update it. This protects your child from the negative consequences of your default while also allowing him to keep some credit history he can build on in the future.

One Tradeline and Your Teen Can Build His Own Credit From There

All you need to do to build your teen's credit is to give him one tradeline. A single authorized user account is enough to create a credit report and score for your child. The longer the account remains open and reporting, the more weight it carries (the age of an account factors into your credit score). Once your child turns 18 he can take the reins and the foundation you've given him and use it to build his credit score up even further. Here are just a few basic credit-building methods a person with limited credit can use to increase his tradelines and, ultimately, his credit scores.

  • Student credit cards---These often have lower requirements than standard credit cards and can help your teen build more credit once he starts college. 
  • Secured credit cards---Allows your teen to pay a deposit he can then borrow against to build credit. Make sure the credit card company reports accounts to the credit bureaus. Not all secured cards do. 
  • Borrowing against his own money--If your teen has a savings account, his bank may agree to give him a small personal loan in the amount he already has in his account (or slightly less if you factor in interest). He can use his savings to repay the loan and build credit. 
  • Finance a car--Just about anyone can get an auto loan these days, bad economy or not. Auto loans almost always appear on your credit report. Just make sure to shop around for a decent interest rate. 
  • Store cards--Store cards often have less-stringent approval standards than regular unsecured credit cards yet still report payments to the credit bureaus.
  • Get a job--Getting a job doesn't directly affect your teen's credit, but lenders are a lot less likely to work with individuals that don't have a steady income. A steady job, even a part-time job, makes your child a better candidate for credit cards and loans and, in turn, helps him build his credit. 
The right age to start building your kid's credit is up to you. Obviously a ten-year old doesn't need a credit report. And its up to you whether or not to actually give your child the authorized user card and let him use it. Although having his own card helps your child learn more about managing money, don't put yourself in a sticky financial situation in the hopes of teaching your children more about money and credit.. Whatever route you choose, give some serious thought to helping build your teen's credit--it could make a world of difference for him as an adult.

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