When you first introduced your baby into the world, you probably didn’t think much about the specifics of their financial future or how soon you could start to build their credit score. Maybe you thought about who they would be when they grow up, what color hair they’d end up having, and if they looked more like mommy or more like daddy.
We’re not here to say you should stop imagining the person your baby might become, but rather to encourage you to take a hand in shaping that person, especially as it relates to financial literacy and healthy credit. Your child’s behavior can quickly become their habits, while their level of understanding impacts their own judgment of said behavior.
One of the best ways you can promote positive habits for the future? Teach your children young and keep teaching them at every stage of life. Building credit history and an understanding of money from an early age can set kids up for success in adulthood. According to a study by Purdue University, money only correlates to happiness up to a certain amount. Maybe money can’t buy happiness, but teaching the correct money management skills can buy you peace of mind.
To point you in the right direction, we’ve compiled a list of what we think are the top three ways you can start building credit for your kid – at any age.
By seizing opportunities to teach your child about the financial side of life early and often, you can prepare them for the world in ways many are not, as Forbes contributor and financial literacy expert Dani Pascarella wrote last year. Best of all, having a financially literate child should make the transition to self-sufficient young adult a whole lot smoother. We can’t promise they won’t be boomerang kids who move back home and prevent you from retiring as you’d planned, but we can offer some tips to promote financial independence before and when they finally do leave the nest.
Counting – it’s easy as 1, 2, 3
Starting at preschool age, it’s a great idea to teach your child the basics of counting. Experts and educators commonly say it’s best to introduce counting before kindergarten, as it improves their readiness for math in grade school. Begin counting practices with hands-on activities and lots of learning by doing. For example, you can count Cheerios together one-by-one on their high chair tray or show objects in different quantities. Double up on the learning by explaining and showing objects in different numbers and colors.
Why count early?
Financial concepts all start here with the essential knowledge of counting.
That’s cash money, baby
Once you’ve established a very basic idea of quantities, you can introduce physical money to your child. Show them different bills and coins, but be on the watch for little ones wanting to put small coins in their mouth. Let them be a witness to using cash at the store and introduce the concept that physical money is exchanged for products or services. An easy way to illustrate this at home is to play store and involve lots of imagination.
Why show them now?
The earlier you can start to show how money is earned and spent, the easier it will be to build on this concept for applied math skills.
Saving starts now
Opening a savings account is one of the most beneficial steps you can take early on in your child’s life. Later, you can explain the concept of compound interest and the value of saving money instead of spending it. The earlier you start putting away money for the future, the more you will (both) benefit later on.
Why open it now?
Starting a savings account in your child’s name gets their name on the record for having a documented history at a financial institution, even if you’re the one managing the account until they’re 18.
Talk about money
We bet your young child has a lot of questions about anything and everything at this stage. Let this natural curiosity of the world work in your favor by encouraging dialogue about money. Talk about how it’s earned, show them how you pay at a store, help them understand how to count money more thoroughly and let them interact with cashiers.
Why talk about it?
Curiosity drives knowledge and behavior. The more knowledge they have at a young age, the easier it will be to build confidence and responsible habits with money.
(Piggy) Bank on it
So you talked the talk. Are you ready to walk the walk? Put your money lessons to practical use with your child’s own piggy bank or savings jar. You can start to influence their attitude toward saving for a big purchase, earning money versus getting it from mom or dad, and by encouraging smart buying practices – even if they can’t yet grasp the concept of a luxury purchase over a necessity.
Why teach participation now?
A study by the University of Cambridge confirmed that adult money habits are set by the age of 7. Planning for the future by understanding the value and management of money at an early age directly impacts your kid’s choices (and their corresponding credit score) later on.
As soon as you’re ready – and as soon as your credit card company allows – you should add him or her as an authorized user of your credit card. Assuming you’ve been diligent on your payments, responsible on your credit utilization and have had the account for a decent amount of time, adding them now will start building their good credit history.
Why is this necessary?
One of the ways credit agencies score you is on the length of time you’ve had credit. The longer, the better. If you don’t feel comfortable giving your child a card just yet, you can always hold onto it until the time feels right. Just having them on the account is beneficial now.
Earn and learn
Offer ways for your young teen to earn money (and continue those established saving habits) with an allowance or small “jobs” around your home or neighborhood. Many kids in the pre-teen age enjoy a little independence with money. Make sure to reinforce good spending habits and reward their good work ethic.
Why bother with allowance?
Earning money is key to financial self-sufficiency. Learning you can’t spend more money than you’ve earned is essential in building a lifestyle that doesn’t include massive piles of debt resulting in negative marks on your credit score.
Help create a budget
Teach your young teen budgeting skills to encourage responsible spending of their hard-earned money. Share the ins and outs of your own family budget to educate them on how fund allocation is necessary in adulthood. Sure, they won’t need to set aside money for a car payment or mortgage just yet. But – you can demonstrate how budgeting helps you organize your income in a meaningful way.
Why share your budget?
Real-life application of budgeting is critical for this age group. Learning that money is a finite resource that shouldn’t be funneled into only one category is a lesson that will take them far. Payment history, established with a thoroughly formed budget, will impact their credit score when they start bringing home real income in adulthood.
Charge it (with your support)
First and foremost, educate your child about the pros and cons of credit card usage before you give them their first authorized user copy of your credit card. Set some guidelines and hard rules for usage, including spending limits, permission before swiping, and outline consequences of misuse. Understanding responsible use of a line of credit now will positively impact their habits with credit later in life. Plus, they’ll build their credit score by simply having their name on the account.
No credit card? No problem. You can use your debit card, with parental controls, on an app. From age 6 to 18, you can use the gohenry app to teach them good money habits.
Why should you let your pre-teen use your credit card?
Understanding responsible use of a line of credit now will positively impact their habits with credit later in life. Plus, they’ll build their credit score by simply having their name on the account.
Score a summer job
Encourage your teen to seek part-time employment during summer breaks to put their money knowledge into practice. Have them show you their plan for spending and saving their money. They can also start learning about taxes and direct depositing their pay.
Why is a job important?
By your child’s late teen years, they should be very familiar with the basics of budgeting and earning money. Responsible habits are best learned at this stage by having their own source of income. Of course, it doesn’t need to be full-time. Just one day a week is enough to be worthwhile.
Time for new topics
Now is the time for them to learn about more complex financial concepts and concerns, such as: debt, APRs, identity fraud and credit scores. You may be surprised to find out your child may already be able to check and monitor their own credit report (if they’re too young or inexperienced to have a record, it’s good for you to monitor anyway for cases of identity theft).
Why learn now?
They’re capable of understanding more complex financial issues by now. It doesn’t hurt for your kids to get familiar with the idea of credit scores earlier than teenage years, either. Have an open dialogue about the pitfalls of debt, the ways you can protect your identity and how they might accidentally lower their credit score (possible by opening too many new accounts at once or missing a payment).
Help them establish a payment history now. If you haven’t already, you can add them as an authorized user on your card(s) to establish and monitor healthy spending habits, add them onto a monthly bill of yours or allow them to have their own training-wheels credit card with increasing credit limits as they create a timely payment history.
Why does this matter?
Good payment history is one of the most important aspects of determining credit scores – accounting for 35% of your FICO score.
Show them they can get credit for paying their own college rent on time with rent-reporting services, such as Rental Kharma or Rent Reporters. If you missed the chance to help build their credit score until now, there’s still time to set them up right. Rent reporting is rarely an aspect of your credit score – unless it is made available to credit agencies. Many rent reporting services are free, while others charge a fee for reporting to agencies.
Why report rent?
Making rent payments on time is a great example of payment history for young students who may need every advantage they can get. Your kid may not have everything a good credit score requires, but having something is better than nothing at this point.
Take on responsible debt
Sometimes a manageable amount of debt is necessary and can even be a positive influence on your kid’s credit score with timely payments established early on. Discuss the opportunity to apply for student loans with the possibility of your co-signature and educate them on the types of loans for school.
Why take out a loan for school?
Aside from the obvious benefit of paying for your kid’s school expenses, a student loan helps establish a long credit history due to their lengthy term limits for repayment.
Practice makes perfect
Now is the time to ensure they’re utilizing all the budgeting skills you taught them when they were younger. College can be a time of low to no income, high stress and big responsibilities. A well thought out budget can make this lifestyle a little easier.
Why oversee their budget?
As their parent, you’re the expert. You know how to cut expenses, pinch pennies, and score the best deals. Your expertise and assistance will help them as they live on their own for the first time and experience how budgets impact their everyday life.
Co-sign on the dotted line
Your young adult may be fresh out of college or straight out of high school. Either way, co-signing for a loan, new apartment, or line of credit can be a big step in fostering their financial freedom. If you’ve done your part in teaching financial good practices until now, you should feel comfortable with taking this potential risk.
Responsible co-ownership of a loan or line of credit will benefit both of your credit scores by building history, timely payments and proper credit utilization – where applicable. Just be sure you’re financially ready to take on the full payment if your young adult runs into a bump in the road with their ability to pay.
Save for emergencies
As a young adult, it can pay to have money put aside for an emergency or unexpected expenses. Putting together an emergency fund helps avoid using a line of credit for expenses that tend to pop up when you least expect them.
Why encourage savings?
Your young adult will thank you when they can use appropriately allocated funds for a car repair instead of maxing out a credit card and negatively hitting their credit score – which would lower chances of their approval for future loans, cards, and more.
Small purchases, big reward
Help your child navigate spending as a young adult with their own credit card for small purchases. Based on their income, payment history, credit history, age and other factors, your young adult may qualify for a secured credit card (requiring a deposit), student credit cards or traditional credit card with a variable APR. Check in with them on their spending habits to encourage less than 30% credit utilization and spending on everyday items like groceries or gas.
Why use credit for small purchases?
Building credit as a young adult with responsible use can set them up for credit card rewards, such as airline miles or store discounts. Even better, a good or excellent credit score from consistent and responsible use can give them great approval odds for securing an auto loan or home mortgage when the time is right.