3 Ways to Help Your Child Establish Credit
My parents helped me establish credit at a young age. At the time I didn't realize it, but it started me off on a path to having a great credit score. I've never had problems obtaining credit/loans with good interest rates and I was able to easily secure a job in the financial industry. Not to mention, my insurance rates are also favorable. So if you have kids, here are tips to help get them off on the right foot credit-wise.
Teach them to save
Saving doesn't affect credit directly, but what it does is create a good habit. Purposely saving up money for a goal allows people to avoid accruing debt, which can have negative affects on your credit. When I was around 11, I wanted a 13 inch TV in my room. My parents said I could have one, but I had to earn the money and save up to buy it. Challenge accepted; it took a while, but I saved up and bought that little TV.
I learned at an early age that you should save up for something you want. Because before that, I remember seeing my mom write a check and wondering why she couldn't just write a check for anything I wanted. As a child I didn't know actual cash needed to be in the account for the check to work.
Co-sign on a small loan*
My first car at age 19 was a Ford Tempo. Not a glamorous car, I know. But I had a small loan of about $3,500 with a small payment that I paid a portion of and my parents paid the rest for. I get that not every parent can afford to cover an extra payment and it is good to be *cautious of co-signing on any loan. But it depends on the child. At the time I had a part time job and lived at home while I was going to college. So this was the perfect scenario to build up my credit and pay on this loan. Be sure to set ground rules if you do decide to co-sign on a loan because if your child doesn't pay, the responsibility to pay for it will fall on you.
If a car loan is too large, think about co-signing on a small personal loan of maybe $500 where the payment is more affordable. I need to reiterate again that if you can't afford to take on the payment if something happens, then don't co-sign EVER.
Encourage on-time payments
Making on-time payments is one of the best things anyone can do for their credit. If your child takes out a car, personal, student, or any other type of loan, tell them that it's really important they watch for statements and always make on-time payments. And if they ever think they might miss or be late on a payment, to call the loan servicer and keep them in the loop.
These are just a few ways you can help your daughter or son establish their credit. And credit is important because it affects many aspects of our lives, not just interest rates. For more info on improving credit, 'How to Teach Kids Smart Money Habits'.
LSS Financial Counseling is here to help people achieve financial goals and conquer their debt. If you would like a free financial counseling session from a trusted nonprofit, call us at 888.577.2227 or GET STARTED ONLINE. Take action today. Your future self will thank you.
Author Elaina Johannessen is a Program Director with LSS Financial Counseling.