Building Credit for Teens and Young Adults
By Ashley Rittershaus
Credit can impact so many different areas of life. It can determine your ability to borrow money, interest rates on a car loan or mortgage, and even your ability to get a job or apartment. If you have children, it’s not too early for them to learn how to build and maintain good credit. And you can help.
Maintaining Good Credit
Before your child is responsible for their own credit card, it’s important for them to understand what makes up their credit score and how to maintain good credit. This website has some good information on how credit scores are calculated: https://www.myfico.com/credit-education/whats-in-your-credit-score. The biggest determinant in building good credit is making on-time payments. The other items that impact the score are amounts owed, length of credit history, new credit, and credit mix.
Children should also learn how credit card interest works, and the importance of paying the full balance each month to avoid high interest charges.
Building Credit – Under Age 18
Even children under 18 can start building credit. Adding your child as an authorized user on your credit card may help; you’ll want to check with your credit card issuer to make sure your child’s activity gets reported to the credit bureaus. Other banking products may help children under 18 build credit as well. For example, Step is a bank account with a connected Visa Step Card designed to help teens under 18 build positive credit. Whatever route you choose, it’s best to set spending limits on your children’s cards, since you are ultimately responsible for any charges.
Building Credit – Age 18 and Over
If your child is legally an adult, you can help them shop for a credit card. Look for one with no annual fee and preferably a low interest rate, even though interest charges only kick in if the balance is not paid in full each month. It may be more difficult for your child to get approved for a card without much credit history, so here are some options:
- Student Credit Card: A student card is a great first credit card for a college student, as it is generally easier to get approval than most other credit cards. Your child can also look for cards that offer prequalification or preapproval, so they can check their likelihood of being approved before applying and affecting their credit score.
- Secured Credit Card: If your child isn’t approved for a “regular” or student card, a secured credit card is a great option. These cards require a cash deposit usually equal to the credit limit.
- Co-Sign Credit Card: Another option is to co-sign on a credit card for your child. Just beware that even though your child is building their creditworthiness, you will be ultimately responsible for the debt incurred on the card.
What Counts as Income on a Credit Card Application?
One item that might hinder your child’s ability to receive card approval is lack of income. However, according to this Forbes article: “Students can list actual income from a job if they have one. In addition to income from a job, regular allowances or bank deposits received from parents or family can count toward income. As long as monthly bank statements prove the income, they’re valid as income on a credit card application.”
Making regular deposits into your child’s account, which they can then use to pay for their own expenses, is a way of imparting good money management habits. And as long as deposits are regular, they can have the added benefit of serving as income on the child’s credit card application.