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Credit is an essential part of adult life. Once your teen grows up and is ready to rent an apartment, buy a car or take out a mortgage, they'll need a credit history. With a good credit history, they can land better interest rates and more favorable terms, which may save them thousands of dollars over their lifetime.
As the parent of a high school or college student, there are a number of ways you can help your teen build a strong credit history setting them up for success.
Educate your teen on credit card basics
Unfortunately, personal finance isn't always taught in high school or college. Therefore, it's a good idea to sit down with your teen and teach them how a credit card works and how building good credit can help them in the future.
It's also important to warn your teen about the consequences of poor credit and carrying too much credit card debt, and what credit card mistakes to avoid. When discussing credit with them, be sure to keep things simple and stick to the basics, as they may be overwhelmed if you provide them with too much information.
Test the waters with a prepaid card
Before you open a credit card for your teen, consider providing them with a prepaid card. A prepaid card can allow them to make purchases while getting used to living within their means.
Because prepaid cards come with fees and can’t build your teen's credit history, they should only be used for a short while until your teen has demonstrated good financial habits and you believe they’re ready for a credit card. Prepaid cards are more appropriate for younger teens who are still in high school and learning how to be financially responsible before college.
Open a checking account
Most financial institutions offer checking accounts for minors or students. These accounts typically have lower fees than standard accounts. By opening a checking account for your teen, you can help them get used to making deposits and keeping track of how much money they have. When you believe your teen is ready, you can add a debit card that's linked to their checking account.
If you'd like to monitor your teen's account to make sure they’re going down the right path, you can become a joint owner on their account. Keep in mind, however, if you do become a joint owner on your teen's checking account, you'll be responsible if they overdraw it.
Sign your teen up for a credit card
Once your teen has proven they’re responsible with a prepaid card or their checking account and debit card, it'll be time to take the next step and sign them up for their first credit card so they can begin building their credit history.
According to the Credit CARD Act of 2009, anyone under age 21 can get approved for a credit card without a cosigner or their own source of income. If your child doesn’t work, you'll need to cosign their application.
You can also make them an authorized user on your credit card. This is the ideal option if your child is still in high school, as it can help them establish a good credit history while they‘re living with you and you have more control over their actions. Not all card issuers automatically send payment data to the three main credit bureaus (Experian, TransUnion and Equifax), so when you're considering adding your child to your account, be sure to find out if yours does.
Consider opening a joint secured credit card
If you'd like your teen to have their own credit card but are concerned they may ruin their credit or your own, you can open a joint secured credit card. Because secured credit cards require an initial deposit that serves as the credit limit, doing so will limit the amount of credit available on the card and help them prevent overspending. Although secured credit cards usually carry higher fees than traditional cards, they can still help your teen build credit and provide you with some peace of mind. Some secured credit cards will transition cardholders to a standard unsecured credit card if they maintain good financial behavior with the card.
Teach your teen how to monitor their credit history
After you’ve either opened a credit card for your child or added them as an authorized user on your card, you'll need to teach them how to monitor their credit history. You may want to show them what your credit reports look like, so they know what to expect. Feel free to pull your report or help your child pull theirs by visiting Experian's free credit report page.
Be a good role model
Teens learn from their parents' behaviors, so it's important to set a good example for your high school or college student. Practice what you preach and pay your credit cards on time and in full, live within your means, and stay out of debt as much as possible. If your child knows you practice healthy financial habits, they'll be more likely to do the same.