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After graduating with my master’s in 2005, I felt like I had it all: a shiny new degree, a supportive partner, and a new job.
Then I pulled my credit report when we were looking for a home, and there was nothing there.
It made sense. I had scholarships and worked two jobs in college, plus my parents helped when I came up short on tuition. I bought my car for $2,000 from my mom, and I had no credit cards or loans.
Before my early 20s, I never really thought about credit, nor did I understand the importance of building it. My parents, who taught me how to save and budget, didn’t think about my credit either. The issue arose when I was 23, and my partner and I were ready to apply for a mortgage. Thankfully, we were able to take steps to build my credit and eventually buy our first home — but it was still a problematic roadblock.
Your student can avoid a similar roadblock by learning and taking the right steps — and you can help. Here’s how to teach your teen about credit and why it’s important to build credit early.
Like many people, I grew up thinking that credit cards and loans were dangerous, so I never applied for either. My parents taught me to budget and save for what I needed and that’s what I did. Little did I know, my credit score and history were a key — and a missing piece — to the financial puzzle.
Although many families may be reluctant to discuss credit openly with their teens, whether due to a lack of knowledge or fear that they’ll spend beyond their means, it’s an important topic. After all, the length of your credit history accounts for 15% of your credit score. And your credit score impacts many things, from your ability to qualify for certain student loans to your ability to rent a home, get a mortgage, and buy a car. A higher credit score generally means more favorable loan rates and terms as well.
Teaching your teen about credit and helping them build it can give them options later in life. And although credit may feel like a sensitive topic, it’s worth discussing anyway. As you’re talking with your teen about saving and budgeting, make establishing credit part of that discussion. Doing so will offer them a complete financial picture and could help them make better financial decisions down the line.
Teaching your teen about credit and working with them to build it early could help them avoid roadblocks like the one I encountered in my early 20s. Here are some strategies to help you start:
Before your teen ventures into the wonderful world of building credit, it’s essential to lay the groundwork for success. If you’ve already introduced the concept of budgeting, you’re on the right track. If not, there’s no better time than now to explain how to make and stick to a budget.
Talk with your teen about budgeting and guide them in creating a system that helps them pay their expenses and save some extra cash. It could be as basic as a simple spreadsheet, or they might want to download an app like Mint that helps them track spending on their phone.
Once they’ve started using a budgeting tool and have a good idea of where their money is going, start working with them to establish their credit.
If you have a long credit history and a decent credit score, you can help your teen get a leg-up by making them an authorized user on your credit card. Essentially, this gives them permission to use your credit card. They’ll receive a card of their own that’s linked to your account, so you can share expenses and track their spending. This can be handy if they’re away at college and you want to be sure they’re spending responsibly.
As an authorized user, your student will benefit from your positive payment history. When we struggled to get a mortgage, my partner added me as an authorized user, which helped boost my credit score over time.
Keep in mind that some credit cards have a minimum age requirement for authorized users, and others do not. Call your card issuer to ask about their authorized user policy, and learn more by reading "Should You Add Your Student to Your Credit Card?"
Alternatively, if your teen is financially responsible and 18 or older, you may want to get them their own credit card. Encourage them to think about their situation and goals beforehand, and then help them apply, if needed. The best first credit card for your student will depend on their credit history and how they plan to use the card.
For instance, a secured credit card might be right for a teen with a limited credit history. Typically, with a secured credit card, you deposit a certain amount of money into an account with the credit card issuer, and that money serves as collateral. So, if your teen fails to pay off their balance, the card issuer will deduct the money from their deposit.
If your teen already has established credit and a decent credit score, an unsecured credit card may be a better option. With an unsecured card, the issuer doesn’t require a deposit as collateral; they trust the cardholder to pay down the monthly balance. For instance, an unsecured travel credit card could be a good fit if your student plans on a semester abroad.
Discussing money with your teen isn’t a one-and-done conversation; instead, it should be ongoing. Periodically check in on their spending, talk to them about the importance of using credit responsibly and spending within their means, and answer any questions they might have. Encourage them to learn about money topics that interest them on their own.
Helping your teen establish financial literacy early on will set them up with the knowledge and tools for their next money milestones, like investing for retirement. Some of the most popular investing apps allow you to get started with as little as $1, so your teen doesn't need to wait until they have huge savings to dip their toes into investing. Opening a retirement account early is an excellent way to set them up for long-term financial success. (It’s something we probably all wish we’d done sooner!)
Although you might be hesitant to talk about building credit with your teen, doing so can open doors for them in the future. Whether they need to apply for a loan, rent an apartment, or eventually get a mortgage, establishing a positive credit history early can help them accomplish their goals.