Here’s the best way to build credit for your Gen Z kid
Having good credit means more than just meeting the qualifying requirements for a great interest rate on a car loan or mortgage. It impacts the things you do every day, without you even knowing it.
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Your credit score is calculated based on the information in your credit reports. The higher the score, the better your credit risk. So you can benefit from lower annual percentage rates on your credit cards, receive lower premiums on your home or auto insurance, have access to higher lines of credit, receive easier approval when you rent an apartment or get utilities for your new home, or even subscribe to a mobile phone plan.
Having good credit – and maintaining it – is crucial for young people to their financial future. And that’s where parents come in.
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As the parent of a preteen, teen, or even a young adult, you can help your children build the good credit they will need throughout their lives. To have the most impact, financial experts say start early.
“Teaching it about credit will allow them to make better decisions in the future and will help them continue to build and maintain a good credit score as they grow up, saving them thousands of dollars as well. throughout their lives, ”said Ben Arbov, the founder. and CEO of Greatest Gift, a financial giving platform to help kids save money in the long run.
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Start discussions about money early
If you didn’t talk to your kids about money when they were little using old-fashioned sayings like, “A dime saved is a dime earned”, it is not too late.
In college, kids understand the difference between needs and wants. Share with them a snapshot of your monthly budget so they can see the choices you need to make and explain why you are saving for that new dishwasher you need instead of just going to the appliance store and picking up your credit card, then pay interest for that dishwasher.
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College is a good time to give your child a prepaid debit card – ask Grandma to give it to your child for the holidays instead of the typical $ 100 bill. Thus, children can safely experience using a card for purchase online or at checkout. At the same time, you can explain that because your credit cards have a credit limit, they also have one – $ 100. With the prepaid card, there is no risk of overdrafting as with a credit card. He’s just going to run out of money.
In high school, and under your watchful eye, your children can be introduced to their own credit card which will help them build up credit. There are two ways you can help your child: Once you’ve explained the power and pitfalls of a credit card.
“Children between the ages of 14 and 18 are ready to discuss debt, investing, loans and credit. The 17 and 18 year olds are preparing to enter college and their mailboxes may already be filling up with credit card offers, ”said David Jones, director of real estate strategy at Bailard, a manager of wealth and assets based in the Bay Area. “Providing tips for navigating student loans and credit cards will help them make vital decisions about their college education or general budget as they become self-employed. Understanding good debt and bad debt when implementing credit into their bank accounts and wallets will positively influence how they spend, and even how they invest, their money.
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The first credit card
The first way to help your child build up credit is to add your child to your credit card as an authorized user. Since not all issuers report authorized users’ credit histories to the credit bureaus, make sure yours does before you take this action.
By doing this, your child can benefit from your good credit. As you use your card and pay it off in full or make monthly payments on time, your authorized user will benefit from your good use of credit, and this will be reflected on a credit report and in a credit score. .
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TRICK: Some credit card issuers don’t have a minimum age, so you can make your child an authorized user while the little one is still in diapers. “My boyfriend’s parents put it on their credit card when he was a baby,” said Sequoia Craig, marketing consultant and web designer in Northern California. “His credit rating was excellent before he even knew it because of the length of the credit.”
But it’s not just about your responsible credit habits; you also want to teach good credit habits. Set rules for using credit cards based on your child’s ability to pay, income from babysitting, lawn mowing, retail work, etc. Start small with something manageable – your teen’s Netflix subscription, for example – and increase the limit you set on usage as you see a stable, on-time payment history.
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It’s not the best option for your family if you’re struggling to pay your bill or if you think your teenager might be irresponsible with the credit card you provide.
“The traditional way to help a child build credit early on is to give them a credit card and build credit for parents’ credit,” agreed Darren Nix, founder of Steadily, a company. homeowners insurance. “The problem with this method is that either the child and the parent will end up with good credit or both will have bad credit. There is no combination or happy medium.
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You can take your credit out of the mix by helping your teen get a secured credit card, a great card for creating credit from scratch. Although it works like a regular credit card, it does require a cash deposit to open the account. If your child deposits $ 500 as a deposit, $ 500 is the credit limit. The bank can use the deposit to pay off your balance if the cardholder defaults.
Since interest is usually higher on secured cards, parents should stress the need to pay off the balance each month and before the due date. After several months of good payment history, call the issuer and ask to switch to an unsecured card. The cardholder will get the deposit back and get a lower interest rate on the reissued card.
“Ideally, they should learn to make small purchases that they can cover – something like gasoline,” said Jake Hill, CEO of DebtHammer. “Then they pay it off on time and it gets a good rating for their credit score. “
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And finally, don’t just focus on credit cards, said Clemy Jajati, CEO of Thor Capital Group.
“In addition to adding a teenager to a credit card as an authorized user, you can also help them build credit by co-signing a car loan for them,” Jajati said. “Even if they’re not the ones making the actual payments, the loan will still show up in their credit history. Keep in mind, however, that some lenders will not accept a minor as a borrower, even if you are willing to co-sign.
“A good credit score comes down to a combination of variables, but the one that is often overlooked is your credit combination. You can help your child create this mix by researching and having their name on different types of loans.
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Last updated: September 21, 2021
This article originally appeared on GOBankingRates.com: Parents Pay Attention: Here’s The Best Way To Build Your Generation Z Kid’s Credit