How to help your teen responsibly build credit
And what to discuss so they don't show up a day late and a dollar short
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A teenager can’t apply for their own credit card until they reach age 18—and even then, young cardholders are subject to restrictions under the Credit CARD Act until they turn 21.
But, in the meantime, there are ways for high school students to get a jump start on establishing credit, which can set them up for better interest rates with student or car loans, approval for an apartment, and beyond.
In addition to demonstrating sound financial habits, here are some steps parents can take with their kids to introduce them to credit.
First, teach your teen about earning
To help your child learn the basics of personal finance, you may encourage children to earn money through a part-time job—also a wise way to instill responsibility. They’ll understand that money is earned, and develop a greater appreciation as well as a strong work ethic.
While taking on too many shifts can get in the way of studies, family obligations, and extracurriculars, finding the right balance may lead to better performance at school.
Introduce your teen to banking
If your child is working, they will likely need a checking or savings account, and the good news is banks often waive service fees for students. Even if they aren’t clocking in, you may consider opening one to stash gifts from family members following celebrations like birthdays and graduations.
Walk through the process of endorsing a check, and discuss how it’s deposited. If your child is employed, their company may prefer direct deposit. In this case, show them how to fill out the paperwork to set it up, while explaining terms such as a routing number.
A checking account also presents an opportunity for a teenager to get a debit card. Talk about creating a budget, and how a debit card draws from the liquid funds in their account. The practice of swiping that debit card will teach a teen that money is being deducted as they spend, laying the foundation for healthy money management before they take on credit.
You may even consider opening an account with a company like Greenlight, which has built-in tools that let parents limit which stores kids can shop at, and even pay their kids interest for stashing away money to save.
Add your teen as an authorized user
Once they become familiar with a debit card, you may consider adding your teen as an authorized user to your credit card account. This will help them begin to build their own history, although it will be a bit slower than if they were the primary account holder.
With this move, it’s important to discuss your expectations and set rules about what purchases can be made. Even though the card has their name on it, you are responsible for the charges they make as the account holder. And their actions will affect your credit score, too.
“This allows your child to claim some of your good credit decisions as their own, almost like a joint account,” explains Kateri Turner, financial advisor for the Government Employees’ Benefit Association, a nonprofit that provides insurance plans, wealth management services, and financial advice to the government, military, and their families.
“This will get the ball rolling, but … you don’t want your child to have too much credit at their disposal, especially not more than they can handle,” Turner cautions. Search for a card with a small credit limit; some issuers such as Discover, Chase, and Citibank even let the primary account holder set this amount for authorized users.
While most issuers don't impose any age restrictions on authorized users, Turner says it should make practical sense for your teen to have access to a credit card. For example, will they be getting their license in the near future and filling up at the gas pump?
Be sure to explain some of the common credit card terms, like annual fees, APR, and utilization ratio. Teens should grasp why it’s important to build good credit in the first place, and how to check a credit report.
As with a debit card, teens should also understand that they need this information safe so that it’s not lost or stolen.
Consider a secured credit card
If your teen is 18, a good starting point is a secured credit card, where a security deposit, usually a couple hundred dollars, is put down before the account is opened. This amount is also typically the account’s credit limit.
If the monthly balance is not paid, the credit card issuer uses the collateral funds to cover any unpaid debts. But you should explain to your teen the consequences of missing a credit card payment, from how it impacts their credit score to incurring a late payment fee or a penalty APR.
If your main goal in opening the account is to build your teen’s credit history, confirm that the bank or credit union reports payments to the major credit bureaus. We’ve looked into some of the best secured credit cards around, from Discover to Capital One and beyond.
“Once they establish a payment history, they can request to have the funds returned to them and turn it into an unsecured credit card,” Turner says.
There are some secured cards, such as the OpenSky Secured Visa, that cannot be upgraded, so look into that feature beforehand. Otherwise, when it’s time to graduate to the next step, we’ve also looked at the best credit cards for college students that offer cash-back rewards and incentivize earning good grades.
Have a frank discussion about debt
Credit cards can be a slippery-slope and facilitate over-spending, particularly for those of us who are prone to mismanaging money. That’s why it’s essential that your teen understands the basics of healthy credit—including that responsible use means paying a balance on time and in full each month.
One step further, it’s vital to discuss spending priorities.
“There are two kinds of debt: ‘good’ and ‘bad.’ Anything that is a want and not a need is usually bad debt,” says Mark Charnet, founder and CEO of American Prosperity Group. “For example, expensive clothes go into the ‘want’ category and should be paid for in cash, not financed.”
Of course, there are other dangers they should be aware of, too, from hefty interest charges to mounting debt and identity theft.
But with guidelines and clear communication, young adults can start to build credit, which can set them up for striking out on their own.