Can’t leave your kids a big inheritance when you die? Give them a valuable gift right now by providing the tools they need to build a good credit record and credit score.
Our kids see us using credit cards all the time, but they often have only a vague idea of how credit works. You might be surprised at how many questions and misconceptions teens and young adults have about credit.
Take advantage of teachable moments to educate them from an early age. When you pull out a credit card to pay for a purchase, discuss how those charges represent real money that you’ll have to pay back before too long.
As they get older, explain credit scores and how a good credit score can save them money on interest rates for credit cards, loans, etc. You could use an online calculator to compare what a monthly car payment would be if you had good credit (low interest rate) or bad credit (higher rate).
The sooner kids learn how to budget their money, the better they’re likely to be at paying their bills and building good credit. Provide them an allowance and help them develop a realistic budget so they realize at an early age that money only stretches so far and they have to make choices.
If they ask for an advance, consider charging interest so they’ll understand that borrowed money doesn’t come free. Tie that into credit cards by explaining that they can carry a balance each month, but it will cost them.
Use credit sparingly, and keep up with your monthly payments. You don’t want your kids to grow up thinking that it’s normal to have debt collectors calling on a regular basis to demand payment for overdue credit card bills.
That account will show up on his/her credit record, so if you’ve got a good score, your kid will benefit from that. (Don’t do this if your credit is shaky; putting your kid’s name on a credit card account that has missed or late payments could drag down his score.)
You could also be a co-signer on a credit card application for your child.
Remember that in either case you’ll be responsible for the charges made on the card if your child fails to pay them.
Once your child has a steady job, a retail store credit card can be an excellent start to building a positive credit record. Store cards are usually easier to get, and their credit limit is much lower than a Visa, MasterCard or Discover credit card issued by a bank. That means your child is less likely to get in over her head with credit card bills.
Another good option is a secured credit card (not to be confused with pre-paid cards), which is backed by their deposit into a special account.
Helping your kids build good credit is a gift from you that will last long after they move out of your home and into their own.