Good parents want the best for their children and that includes having a good credit score, when the time is right. It's important that you set a good financial foundation, teaching your child good money management, rather than try to build their credit history for them. It's like doing all their homework for them. When it's time for your child to take the test, they'll fail because they haven't been dong the work themselves. So here's what you can do.
Details follow, but the basic steps are to instill a solid financial foundation including a steady income and good checking account history, teach your child how credit works, and then help them get hands on experience with a credit card of their own.
Before Your Child Gets a Credit Card
Have your child get a job. Law requires credit card issuers to check income for applicants under age 21. Plus, your child needs a steady, reliable source of income to repay a credit card balance. An allowance doesn't count. Without their own income, your child might expect you to pay their credit card bill every month, especially if you've always paid for everything else.
Help your child open a savings or checking account. Establishing a good banking history can help your child build a strong financial foundation, which is a stepping stone for building a good credit score. Your child should get accustomed to making regular deposits into their account(s). Once your teen has a checking account, help them learn how to spend wisely and avoid overdrafts or declined debit card charges.
Make sure your child is ready for a credit card. Has she been managing her income well? Does your child make curfew and meet other deadlines? How well does he manage his checking account? Does he have to ask you for money to avoid overdrafts? If your child has other bills, are those bills paid on time?
Help your child understand credit cards and how credit works; they may not already know. Make sure you clear up any misconceptions about how credit cards work and how good credit is built. Especially make sure your child understands that a credit card balance has to be repaid and the faster the better.
What Credit Cards Are Available for Your Child?
Ideally, your child should build credit in their name alone, using accounts that don't require you to put your name and credit on the line. This is tricky since many credit card issuers require applicants to have a credit history. Your child can start by applying for credit at the bank or credit union where they've held a checking account. In person may be better.
A retail credit card is another solo credit card option that your child can explore. These limited purpose cards are known for approving applicants with little or no credit history. Credit limits are typically low, around $300 or $500. However, retail credit cards do have high interest rates. If your child doesn't pay off the balance in full each month, they'll be paying high finance charges. Additionally, a retail credit card at your child's favorite store can lure them into going on shopping sprees.
A secured credit card is another option. It's like a regular credit card, except it requires a security deposit against the credit limit. Some secured credit cards allow a minimum deposit of $200. You could help your child get a secured credit card by matching their security deposit.
You could jumpstart your child's credit history by adding him or her as an authorized user on one of your credit card accounts, or even a brand new account that you start just for your teen. An authorized user gets all the benefits of using the credit card and even has the credit history included on their credit report. But, the authorized user doesn't have legal responsibility for the debt.
By keeping your child as an authorized user, rather than a joint account holder, you still have control of the account. If your child becomes irresponsible and overspends, you can remove their authorized user status and close the account.
To keep things simple, let your child be the only one to use the account and have him or her pay the bill each month, ideally a few days before the due date. Sit down together and do this for the first few months, then let your child do it alone. Set a rule that the bill should be paid 2-3 days before the due date or else you'll have the account closed.
Getting a joint credit card with your child is risky because the responsibility is different. With a joint credit card, your child gets too much control with a product they're not familiar with and more importantly, a product that can affect your credit. For example, if you try to close the account, i.e. because your child was using it irresponsibly, your child may be able to open it back up behind your back.
Once your child has a credit card, teach them how to use it to build credit.