When it comes to having teenagers, there are a lot of things we as parents need to teach them. And nowhere is this more important than when it comes to to their financial education. Teaching our teens about money, finances, credit scores, etc. is extremely important to do before they leave the nest. There are many different ways we can go about this, of course. But, one of the most important things I feel that we can teach our teens is what a credit score is and how it impacts every aspect of their future financial lives. Therefore, before they leave the nest to fly on their own, helping a teen build credit is high up on my list of important lessons.
1. Get a job
One of the first things I told my teens when they turned 16 was that getting a job would be a good first step into the adult world. Not only does this give them some idea of what to expect in the work world, but it also gives them a first taste of managing their own finances usually. As a bonus, getting a job helps a teen begin to build their own credit.
2. open a checking account
Once your teen has a job, opening a checking account for them is the next best step to help them build credit. Most banks won’t let a child open a checking account on their own, so you’ll need to be a co-signer on the account until they are 18. This is also helpful when it comes to monitoring their spending, as it gives you a way to see everything that’s happening with their money. And it gives you good talking points to discuss with them about budgeting, when they get off track. Which my teens have done more times than I’d like to admit!
3. open a savings account
Whether your teen has a job and/or checking account, they can still get a savings account. We started savings accounts for our kids when they were much younger, just to put money into for them that relatives gave them for holidays. Having a savings account is a good way for them to watch a nest egg grow. And we have found it’s also a good place to put excess money they earn from their jobs is a savings account. This has helped rein in and regulate their excess spending on random junk they don’t need and help them save for bigger goals at the same time.
4. Open a Roth ira
When our kids started working for me, I opened Roth IRA accounts for them. These types of accounts can only be funded by earned income. So they can’t be opened until your teens have earned income that will be taxed. But, once they have some earned income to work with, you can open a custodial Roth IRA for them that will roll over directly into their name solely once they turn 18. This not only gives them a good first taste into investing, at much lower risk than when they do it as an adult, but also helps your teen build credit.
5. get a prepaid credit card
The next option is to help them get a prepaid credit card in their own name. Typically, you’ll have to be a co-signer on the account, as with all of the other accounts. But, with these types of credit cards you determine how much is put on the card to begin with, so that is all they have to spend. This works out really well if they have a job already also. You can tell your teen to set aside $100 – $500 to put onto the prepaid card and then use this card for all of their purchases. This way they are building credit while only spending the money they already have.
6. credit card authorized user
As another option to the prepaid credit card, you can add your teen to one or more of your existing credit cards as an authorized user. I did this for my two older teens just recently with one of the credit cards we never use that also has a high credit limit. I chose to put them on this one since we don’t use it because it’s easier for me to track who is spending what. Plus, since it has a really high limit, it helps boost their credit that much faster due to the amount of credit used versus the credit available. So far, they’ve both been paying off what they spend before the bill even closes, which is awesome!
7. teach them about credit scores
After all of these other options, the most important thing to teach them about is their credit score. Since they are trying to build credit, understanding how their credit score impacts their financial future is integral to overall financial health. If they have any of the aforementioned accounts opened, they can begin to see how their saving and spending are affecting their credit score. Which is a fantastic way to give them an early taste of how the whole system currently works. And don’t forget to show them how to pull their annual credit report each year so they can run through it for any discrepancies.
Teen building credit summary
Overall, there are a lot of great ways to start helping your teen build their credit score early on. While I don’t use the prepaid credit card method, I have used every other option to help my teens build their credit now. And, they’ve been doing awesome so far with the learning curve. So my hope is that by the time they are out on their own, they won’t have nearly as many issues as a lot of young adults do with their first taste of financial independence.
What are your favorite ways to help your teen build credit early?