Helping your high schooler build and use credit is an important step for their financial future.
High schoolers with a credit history face fewer hurdles obtaining a major credit card that they can use for emergencies, travel or pay for college expenses down the road. Building credit early in adulthood may also make it easier for your children to secure their first apartment or find competitive rates on private student loans, auto financing and even a mortgage.
Although the types of credit products your high schooler can obtain will depend on his or her age (and how involved you want to be in his or her credit), there are a number of ways to help your high schooler build credit. Here are a few ideas to help your kids establish the credit history — and good credit habits — that will benefit them in adulthood.
Consider Options Based on Your Child’s Age
There are great credit cards for students that offer low interest rates, no fees and the ability to earn rewards for purchases, but your high schooler must be least 18 years old before he or she can apply for one.
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Once They Reach Age 18
Assuming your high schooler is of age, you have several options to help her build credit:
- Co-sign your child’s credit card application. This can help your high schooler obtain a first credit card, despite not having a credit history. Yet, as CreditCards.com points out, co-signers are held responsible for amounts owed if the cardholder doesn’t make payments as agreed. (That could leave you on the hook for the entire balance, including interest rate charges and late fees, and it could have a negative impact on your own credit history.)
- Help your child apply for a store credit card. Store credit cards may not require applicants to have as robust a credit history as many major credit card issuers, so they can be a good way for high schoolers to build credit in their own name and learn to use credit. Because store cards are not widely accepted and usually have low credit lines, they may allow you to maintain more control over how, and when, your child uses the card.
- Encourage your child to save for a secured credit card. Secured credit cards are great credit cards for students to learn to use and build credit. Although your high schooler will need to deposit a small sum of money to secure the credit line (which varies by creditor), there are plenty of good secured credit card options that have no fee, report credit activity to the credit bureaus monthly and offer rewards. Once your high schooler proves a history of using the card responsibly and making timely payments, she may be offered the opportunity to graduate to an unsecured credit card (at which point the money deposited to secure the credit line may be returned).
Before They Reach Age 18
If your high schooler isn’t yet 18 years old, you can help him build credit by adding him as an authorized user to one or more of your credit card accounts. (You can do the same for kids who are older.)
Although you, the primary cardholder, are held responsible for what’s charged to the card, your high schooler could build credit through association with your credit as an authorized user. That said, the Consumer Financial Protection Bureau (CFPB) warns that just as your positive credit use can benefit an authorized user’s credit history, the opposite is also true. If you make late payments on the account, and/or allow it to go into default or collections, those events reflect on your child’s credit history, as an authorized user.
Teach Credit Monitoring Habits
Once your child has either obtained his or her own credit card and/or become an authorized user on your card(s), pick a memorable date to remind yourself to pull your child’s free credit report(s) once a year from AnnualCreditReport.com.
In addition to reviewing the accuracy of personal information like your child’s name, social security number, address history and accounts on the report, teach your children about the items in the report that will help them build a positive credit history and credit score.
- Payment history. Stress the importance of paying at least the minimum amount due on credit card statements, and scheduling payments to arrive on or before the payment due date. Educate your high schooler that although payment mistakes may happen, late payments must still be paid, and a history of missed payments can significantly lower the credit score. As explained at Bankrate.com, the longer a payment is past due, the more it hurts your credit score.
- Amount of credit in use. Your high schooler’s credit report will indicate the monthly balance on his credit accounts, along with the credit limit. Though credit expert Evan Hendricks tells Bankrate that credit balances should not exceed 40% of the credit line, he says it’s better to use less — ideally, no more than 10% of the credit line. For a high schooler whose credit card will likely have a low credit limit, maintaining those ratios requires the discipline to think carefully about what they charge.
- Inquiries. When you apply for credit, lenders pull your credit report. This is called a “hard inquiry”, and it could lower your credit score. Soft inquiries do not impact your credit score. A “soft inquiry” happens when you check your credit report, or when a credit card company that wants to send you a pre-approved offer of credit checks your credit report. Teach your children to review this section of their report so they know who looks at their report — and to manage the amount of credit for which they apply.
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As your high schooler builds a credit history, he or she will likely receive offers to apply for more credit cards. Teach him or her to review each credit offer wisely before applying, so he or she doesn’t harm the credit history being built.