There is so much to worry about when you’re a parent. But one thing you may not think much about is your child’s credit score. Like grades at school, that magic number has a lot of influence on their future, reflecting their spending habits and financial accountability. So how soon is too soon to start helping your child build credit?
While one must be at least 18 years old to take on a credit card or loan, you can make your child an authorized user on your credit card. Does the thought make you shudder? Fear not — it’s not as scary as you’d think. You don’t even have to tell them you’re doing it! All it means is that while you use your credit card responsibly, your child will benefit from what you have already established for them without him or her being responsible for any of the charges. It won’t have the same credit-building power as being the primary user on an account, but it’s a start.
If that idea doesn’t appeal to you, there are other opportunities to help when your child is a little older. For instance, you can co-sign on his or her first credit card, which may be a necessity if your child is a full-time college student at the age of 18. You could also co-sign a car loan or student loan, monitoring their commitment to making timely payments (or the promise of them). Co-signing means your child is the primary borrower, which will help build his or her score. Of course, there are risks if they don’t understand how credit and credit cards work or your child tends not to take things too seriously. You’ll be responsible for paying if your child doesn’t, so be sure you’re comfortable with this possibility before moving forward.
All this means, of course, that means education is key. Evidence suggests that educating kids about money will pay off in higher credit scores later on. A 2014 study by the Federal Reserve showed people in states that had mandated personal financial education in schools have higher average credit scores as adults than people in states without this requirement. Unfortunately, only 17 states require it, according to a 2014 survey by the Council for Economic Education. If you’re in one of them without it, it means you’ll likely have to take the lead in making sure your kids know how to manage money and use credit wisely. Even if your kids learn it in school, however, you are still their best teacher and example of how to handle finances and credit.
Most experts agree it’s wise to explain the basics of earning, saving and spending before your children become teenagers. Preteens are likely to understand the concept of borrowing and repaying debts, so that’s a good age to start explaining the concept of credit. And a serious talk about responsibility is definitely in order here. If words fail you, have one of the many books written about the topic on hand, such as The Complete Guide to Personal Finance: For Teenagers by Tamsen Butler
How can you tell your child is credit-ready? Most parents know their children’s strengths and limitations and have gut feelings about when it’s feasible for them to handle money and credit on their own. It may be when they start driving or when they get their first part-time job, enabling them to pay for something in an emergency. For others, this comes as late as college, when co-signing for a credit product makes more sense.
If your child demonstrates an interest in building credit, seems to grasp the idea of building a budget, and saves and spends money wisely, chances are it’s a good risk to go ahead and help them establish credit. Look for his or her degree of honesty regarding money and a willingness to ask questions about something they don’t understand. Impulse spending (an inability to delay gratification) is a red flag telling you the time is not yet right.
Just because you can do all this doesn’t mean you should. Educate your kids about money first, then consider helping them get on the path to a good score when the time is right. And who knows? With all those healthy financial habits under their belts, they may someday find they can get approved for a loan to buy a home of their own at an earlier age than you ever thought possible.