If you’ve ever applied for a loan, you know the importance of a good credit score. A major factor in building a solid credit score, and an area in which many young people fall short, is length of credit.
The best way to set your teenagers up for success in the future is to help them start building credit now. Taking these steps now could save them thousands of dollars in the future by helping them secure low interest rates on any loans they may take out.
Five Ways To Help Your Teenager Build A Strong Credit Score
- Open a checking account. Your teenager should have their own checking account so they can learn to budget and monitor their spending. This is a good first step for managing their personal finances, and will help you learn to trust them with the basics of budgeting.
Your teenager can also get a debit card attached to this account, and begin to use it for expenses. Make sure you explain to them the difference between a debit and credit card, and the consequences of overdrawing their account.
- Show them how to monitor their finances. Teach your teenager how to track their spending and income. Using the Piscataqua Savings Bank mobile app can make this even easier and more accessible for teenagers. They’ll learn to spend only what they have available and become responsible money managers.
- Open a credit card in your teenager’s name. This can be an intimidating step for some parents who worry that their child will go wild with spending once they have access to a credit card. Choose a credit card with a low limit to give you peace of mind while starting to build your teenager’s credit.
Before giving them the card, make sure you sit your teenager down and explain the importance of establishing good credit card habits. Tell them they should treat the credit card like it’s a debit card, and only spend what they have available in their checking account. Make sure they’re paying the credit card off each month to avoid paying any interest or accumulating debt.
Payment history is the most important factor in credit scoring, so teaching them to pay their credit card off monthly will help your teenager build credit and learn a good habit that will benefit them for their whole life. - Monitor their credit card account for as long as necessary until you know you can trust your teenager to use the card responsibly. Once it’s appropriate, you may choose to help them apply for a higher limit, to further build their credit.
Having access to more credit, as long as they’re not spending to their limit, will also help improve their credit score. It’s advantageous for them to have a high limit, as long as you’re confident that they won’t use it to spend outside of their means. - Apply for a loan. Helping your teenager apply for a small loan with you as a cosigner can also benefit their credit score. Diversity of credit accounts is another factor in credit scores, so having a loan in addition to a credit card will help increase their score. Start with a small loan that you’re confident they can pay off and be sure to monitor their monthly payments.
Entrusting your teenager with financial responsibilities like a credit card or loan may seem like a big step, but giving your teenager the responsibility of managing their own finances while you still have some oversight will teach them good habits and help them build a credit score that will set them up for a lifetime of success. Your teenager will thank you when their credit score helps them obtain excellent interest rates as an adult!
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