Today's teens have robust social media profiles, engaging heavily with Instagram, Snapchat and YouTube. If Gen Z'ers—individuals born between 1996 and 2010—want to succeed in the real world too, they must know how to establish and manage credit.
I have three Gen Z'ers living in my home today and want them to leave the nest someday, armed and ready. Assuming you feel the same about your lovely teens, it's in your best interest to help them establish a positive credit profile.
So, where to begin?
Start with the financial basics
Long before the first credit card offers come in the mail, help your child open a checking and savings account. If your child has a Social Security number, you can open this account on their behalf when he or she is a baby. As your child ages, make visits to the bank to deposit extra birthday money or allowance.
Talk to them about how banks and credit unions operate. As they age, introduce them to ATMs and overdraft fees and the importance of taking care of their hard-earned cash. Some banks offer teen programs enabling kids as young as 13 to start utilizing ATMs and basic checking services. If you teach your teen the basics, it will provide a solid financial foundation in money management, something they won't learn in school. (See also: Thanks Mom, For Teaching Me About Finance)
Get a job
Surprise, surprise. Eventually, those teens need a job. They'll learn the joys of filling out applications, hiring forms and later see the implications of taxes. Utilizing their Social Security card will come into play, so there are lessons around protecting their identity and personal identifiable information. Ultimately, their employment history will pave the way for lenders to grant them credit. It's important to note credit card issuers are required by law to check income for applicants under the age of 21.
Apply for their first credit card
Once your teen turns 18, they can apply for a credit card on their own. There is no guarantee they will be granted a card, but there are a few strategies you can suggest. Retail and department stores typically have an easier credit card approval set of standards, and the line of credit will be minimal. Teens should know, however, that these cards often come with high-interest rates, so if they don't pay off their balance in full each month, the interest can be significant.
Another option is to visit the bank or credit union you already have an account with and apply there. If they've seen your teen responsibly manage their checking and savings accounts, they are likely to start them off with a small line of credit.
Finally, a secured credit card is an option. Teens will need to make a deposit against the credit limit of the account, and the bank will hold the deposit just in case they don't make their payments as agreed. A secured card is like a credit card on training wheels, but in time, it can be converted to an unsecured card. The credit profile doesn't note whether the card is secured or unsecured, so the teen is still able to build credit regardless. Remind your teen that they should not apply for a ton of credit cards at once, as the multiple credit inquiries can be considered a sign of financial distress. (See also: Best Credit Cards for Students)
Advance your teen to other credit opportunities
The credit card is usually the first product to try, but older teens may soon advance to student loans and car payments. These more substantial credit responsibilities will thicken your teen's credit profile, creating more credit opportunities for them in the future, assuming they show a positive payment history. Suddenly, they are growing and tracking their credit scores and (hopefully) conquering the world.
"We're already seeing roughly 72% of the Gen Z individuals on the credit file either sporting a credit card or student loan," said Kelley Motley, director of analytics for Experian. "When we look at total outstanding debt for Generation Z specifically, student loan debt actually represents 55% of all the Gen Z debt—more than all the other categories combined."
Financial literacy and credit basics start at home. These are life skills parents must teach, so start early and have the conversations often. If you don't, consider the grim alternative: your adult children living with you for years to come.
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