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Teaching your kids about credit and money habits early can have a long-lasting positive impact on their financial and emotional well-being. Explaining what it means to save and budget are crucial lessons, but so is how to have a healthy attitude toward money, and how they can use it as a tool to build the life they want.
An important element of a child's understanding of money is how credit and debt work. Parents shouldn't leave this out when showing kids the financial ropes. Here's what you need to know about your kids' credit, including how to build it, check it and fit it into your child's overall financial education.
When Should Kids Start Building Credit?
Ideally, a strong credit profile should be established by the time a young person graduates from college or needs to start making independent financial decisions on their own, such as renting an apartment or applying for a car loan. That means the late teen and college years are ideal times to build good credit.
But it's possible to start building credit even earlier. Credit card issuers may allow minors to be added as authorized users to their parents' credit cards, for instance. American Express allows children aged 13 or older to become additional cardmembers, and there's no minimum age requirement for Capital One or Chase cards. Some issuers are more restrictive; Barclaycard, for instance, requires authorized users to be at least 18.
As an authorized user, your child will be able to make purchases on your account, but won't be responsible for paying them off. That means it's likely best to give them access to their own credit card when they're old enough to have a clear understanding of credit and debt. Until then, their credit profile will benefit from your own positive payment history on the account. Some credit issuers allow cardholders to set spending limits for authorized users, so you might explore this option if you'd like some guardrails.
How to Help Your Child Build Good Credit Habits
Kids can start learning about good credit habits before they have access to any credit products of their own.
For instance, when you use a credit card at the grocery store, you can explain that even though you're not using cash, you're still responsible for paying the amount you owe. Or, perhaps you and your partner have a weekly or monthly family budget meeting. You can let your child know that this is the time when the family ensures their savings and debt repayment goals are in order. Your child does not need to know all the details of your finances, but simply expressing the importance of spending responsibly, making on-time payments and keeping your credit utilization low can go a long way.
Other strategies can include allowing your child to earn money for doing chores around the house and helping them split their earnings into savings and "fun" money they can spend on things like video games or movies. The Consumer Financial Protection Bureau has money lessons by age group available in its Money as You Grow toolkit.
How to Teach Your Kids to Be Smart With Money
As you raise a kid, you'll have many opportunities to teach them smart money habits. The right strategy and level of sophistication will depend on their age, but to start, stay mindful of real-world experiences that can lead to teaching moments.
For instance, perhaps your child wants a pet. Along with discussing the responsibilities and lifestyle changes that come with having a pet, brainstorm with your child what it would cost. Make a list of line items for the family budget, such as food, toys and veterinarian visits, and add up what those could cost per month, and how they fit into your budget. Talk about how your child could perhaps save up money to buy the pet a new toy. This can help your child understand that planning and budgeting are important elements of money management, but that it's also OK to spend money on things you enjoy. If money's tight and a pet would cause you to live beyond your means, understanding the money factor in your decision to say no could soften the blow.
Talking to your kids about money is especially important as they get older and have a stronger understanding of concepts like debt, taxes and investing as they start working and saving. You can move from broad discussions as they come up in everyday life to more specific conversations about the cost of car ownership, college, how to budget while at school and how to minimize student loan debt.
Getting Your Kids Started With Credit Cards
While a child can be added as an authorized user to a parent's credit card from a young age, depending on the issuer, that doesn't mean it's the right choice for your family. Perhaps you'll choose to restrict access to the card until the child is mature enough to understand the consequences of running up credit card debt, or have a rule that the card is only to be used in the case of emergency. Maybe you allow the child to buy something on the card once per month under the watch of a parent who can help give context to the purchase.
But once your child turns 18, they may be able to open a credit card of their own. They may, however, have to start with a secured credit card, which requires putting down a cash deposit that becomes the card's credit line. It's a smart option as an alternative to authorized-user status, and as an additional credit-building method. Secured cards often come with a low credit limit, which provides some built-in protection against pricey purchases, but can cause a headache if it leads to consistently high credit utilization. Also, not all credit card issuers report authorized-user activity to the credit bureaus. So if your credit card activity won't help your child build a credit report and score, consider a secured card instead.
Setting your child up with his or her own credit card could be a good opportunity to put your budgeting and saving lessons into practice. Perhaps you'll decide that the child must pay for all their own purchases using their allowance or money from work, if they're old enough. That can help your child start the process of making sound spending decisions based on what they can afford, rather than what they feel pressured by peers or advertising to buy.
Can a Child Have a Credit Report and Score?
Your child could have a credit report and score if you added them as an authorized user to one of your credit card accounts. In that case, the credit bureaus will have received payment and balance information from your account, and as long as you made payments on time and kept your debt levels low, the information on your child's report will likely be positive.
But if you did not work to build your child's credit file, there's also a possibility that your child will have a credit report if they were a victim of identity theft. That means that a thief set up fraudulent addresses or bank accounts, or used the child's Social Security number and other personal information, to open up credit accounts in your child's name. When those financial accounts go unpaid, your child will be left with negative credit information before they've had the chance to make their own credit decisions.
But credit bureaus—including Experian—have safeguards in place in case a credit report has been requested on behalf of a minor (which could signal that a thief is trying to open a fraudulent account). Experian will alert the lender that the Social Security number associated with the credit report belongs to a minor to help keep the account from being opened.
How to Protect Your Child's Credit
While it may come as a surprise that children can be the unwitting victims of identity theft, there are steps parents can take to limit that possibility. Many are the same as the precautions you'd take to protect your own credit: Keep their Social Security number safe, limit the amount of personal information you or your child shares online, and protect documents at home that could provide identifying information if they fall into the wrong hands.
You can also stay vigilant about the signals that identity theft has already happened: Is your child already receiving bills or credit card offers in their name? Has the government confirmed that someone with your child's Social Security number is already receiving benefits when you tried to apply? If you are concerned your child's identity has been compromised, contact the credit bureaus to see if there's a credit report in your child's name when there shouldn't be.
The Bottom Line
Along with manners and sharing, financial literacy should be on every parent's list of important lessons for their kids. Parents don't need to overburden kids with details or stress about money, but they can instead initiate a healthy, ongoing discussion about living within your means. And that includes explaining the importance of using credit as a way to build a strong financial life, starting early.
Learn More About Kids and Credit
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- When Should My Child Get a Credit Card?
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