Teens and credit: How to help your graduate get ahead
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This summer, high school graduates are in the midst of an exciting season in their lives. Many are heading to college while others are going straight into the workforce, ready to start their careers. For parents, this can be an anxious time. Children are leaving home for the first time and parents want to make sure their kids succeed in every facet of life, including financially.
At this point, parents and teens have probably talked about the real world and what to expect. And money has likely come up several times. Some teens may already have checking or savings accounts. But as kids leave the house, it is more important than ever to keep an open line of communication about finances, especially when it comes to credit.
Forming healthy financial habits creates a foundation for building good credit. Just like preaching the importance of getting to class on time, parents should be just as diligent about conveying the importance of paying bills on time. Nothing can ruin credit faster than late payments, especially when you have little to no credit history.
Learning how to create and follow a budget is another important financial habit young people should form. While this may be the last thing your teen wants to spend time doing, creating a monthly budget will open their eyes to the realities of how far money goes in the real world.
With those foundational financial habits in place, teens can start to build their savings and credit history. But which tools should they use to stay on track? Here are some helpful tips to help guide your child.
Credit Cards
There are hundreds of options when it comes to credit cards, and I suggest students get a secured credit card to start building a credit history. This type of card requires the borrower to deposit their own money into an account and set a credit limit. Since you are borrowing against your own money, this is a low-risk way to demonstrate to lenders you can be trusted to pay on time.
Cosigning
Many parents want to help their children get a head start on their credit history, so they’ll cosign for credit cards or car loans. This is a great way to secure a better interest rate, especially if the parent’s own credit history is good. However, this does link the parent’s and teen’s credit score. If your child misses a payment, your credit score will drop too.
The same pitfalls come with adding children as authorized users on credit cards. This is a good way to help young people establish credit and monitor how they are spending, but a large spending spree could damage credit scores by carrying too high of a balance.
Risk
Money can strain relationships. Being open and up front about the risks associated with credit cards is important and will allow you to tackle the problem head on instead of later when a collection notice comes.
Anxiety is a natural feeling when it comes to watching your child take the next step in their life. But partnering with your child to form healthy financial habits now will pay dividends in the future when they apply for their own apartment, purchase their first car and, someday, secure a mortgage on their dream home. And when they invite you over for dinner at that new home, they may just thank you for the knowledge you instilled in them today.