SEATTLE (Creditnet.com) -- Responsible parents should want to make sure their children understand how to build credit. Like it or not, credit scores are a big deal, so why not teach your kids how to embrace them instead of ignore them?
For some parents it might seem easier to just avoid the whole credit issue. After all, credit cards can be dangerous in the hands of a teenager who doesn’t understand how they work. Other parents may understand the importance of helping their children build a solid credit history, but remain unsure about how to do it while protecting their own credit scores.
Wherever a parent stands on the issue, here are three easy ways to help your child build great credit from a young age. Follow these tips and your children should find themselves on financially sure feet relative to peers by the time they reach college. You won’t regret it, and your children will thank you.
1. Start young by opening a checking account and using a debit card
While a checking account and debit card won’t technically improve your child’s credit, the key to building a great credit score lies in establishing solid money management skills at a young age.
Help your child set up a free checking account in their own name, have them regularly deposit any money earned, and teach them how to use a debit card to make purchases. Once your child learns how to spend wisely and to avoid declined debit card charges, they have already mastered the basic skills of responsible credit card use.
2. Add your child as an authorized user on one of your credit cards
“Piggybacking” still works! Don’t let anyone try to convince you otherwise. Parents have been using this tool for a long time to help their children build good credit scores, and you should too.
What you need to do is determine which of your credit cards in good standing is the oldest with a low credit utilization ratio, preferably 10% or less. Then make a phone call to your credit card issuer and add your child as an authorized user on the card. This will in no way affect your credit score, but as long as you continue to keep your credit utilization low and pay your bills on time, the account should show up on your child’s credit reports and give their score a significant boost.
You don’t even need to allow your child to use the credit card to make purchases, but make sure you at least use this authorized-user period as an opportunity to teach them how credit works and how good credit scores are built. Teach by example and keep it simple, focusing on the key point that credit card balances should always be paid in full every month.
3. Help your child apply for a student credit card or secured credit card
Now that you’ve helped your child learn the basics of credit, it’s time to help them start building credit in their own name. New financial regulations have made it more difficult for young adults to obtain credit cards, but with a decent part-time job and the boost you’ve already given your child’s credit score through piggybacking as an authorized user, you should be able to assist them in finding a good credit card and getting approved without your co-signature.
Student credit cards or secured credit cards are a great place to start, as both types of cards are targeted towards those with limited credit histories and chances of approval are high. If possible, try to land a credit card with no annual fee first, as this will ideally be the card your child keeps around long after they upgrades to other cards with better terms and more lucrative rewards programs.
Joshua Heckathorn runs Creditnet.com, a free resource to help consumers learn more about credit and compare hundreds of the best credit cards online. He resides in Seattle and holds an MBA and B.S. in finance.