How to help your child establish a credit history

January 2nd, 2015 Melissa Payne
kids credit history

These days, our economy is increasingly run on credit. If you want to get a mortgage, student loan or just want to put your dinner on a credit card, a solid credit history is needed.

That’s why it’s so important to help your child establish a good financial foundation as soon as they turn 18 and are able to begin establishing credit. Here are some things you can do to help them get a head start on their credit history, rather than having to spend years trying to catch up or fix mistakes they didn’t realize they were making.

Use real-life scenarios as teaching tools

One of the most important steps you can take is to educate your child about how to use credit as a financial tool rather than a source of money.

For example, when you use your credit card to buy groceries, talk to your kids about the chain of events that has been set in motion as a result of that transaction. The store gets its money, the bank sends a bill for the credit card and you – the parents – then pay the bill. Stress the consequences of not paying on time and how late payments will negatively impact your credit score.

Finally, close the circle for your children by explaining how a low credit score can hinder their ability to and increase the cost of obtaining future credit cards, renting or buying a home, financing a car and even purchasing insurance.

Consider a secured credit card

If you want your child to have his or her own card, consider getting them a secured credit card. These types of cards are like regular credit cards, except they require a security deposit against the credit limit. Some secured credit cards allow a minimum deposit of $200.

Let your child know you won’t be bailing them out each month if they can’t afford to pay the minimum balance on their bill. If your child thinks they can depend on you to bail them out, they’re less likely to take responsibility for their credit card.

Discuss the consequences of not paying bills

It is important for your child to understand that even though items like cell phone and utility bills as well as checking accounts don’t help you to establish credit it’s important to practice solid money management habits. If they do not pay their bills, or overdraw their account and choose not to bring it back to a positive balance, it will have a negative impact on their credit report.

Companies and banks will file collection accounts on their credit report in an effort to collect the money due to them and those collections will bring a credit score down, and will make it difficult to increase their credit score until the collections are paid in full.

Review the credit score with your child

Once your child has had some time to establish a credit history, teach them how to proactively pull and check their credit report. They will want to read the report for accuracy and correct any mistakes, if necessary. Also, show your child how to check the actual score and see how the information on their report corresponds with that score.

Remember – teaching your children how to manage credit responsibly is a critical part of ensuring they will have a solid financial foundation when they break out on their own.

About the author

Melissa Payne is the Service Center Managing Officer at MidWestOne Bank.

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