6 Steps to Help a Teenager Build Credit


Author: Angela Colley

Teenagers know a lot of things adults don’t — from deftly using social media to finding perfect smartphone apps. But they’re still learning about money even as they’re spending it.

Understanding and managing credit is important for every teen’s financial future. As adults know too well, what’s in a credit report can influence everything from the mortgage rate you pay to your ability to secure a job.

These six steps will help convert your teens from credit novices to pros:

1. Talk to your teens about money

Talking about money is the first step to putting teens on the right path. The best advice from experts: Keep it simple.

Don’t overwhelm teens with too much information at first. Just stick to the basics, like the difference between using a credit card (which is borrowing money and paying interest on it) and using a debit card (which is withdrawing your own money, free of interest).

Before you have this discussion, make sure you know what you’re talking about. Start by reading:

2. Get a prepaid card

A prepaid debit card will give your teens some low-risk experience using plastic because the maximum they can spend is what’s loaded on the card. This allows them to make purchases while learning to live within their means.

The downside? There may be fees to maintain the account. Prepaid cards also don’t report the user’s spending activity to credit bureaus, which means your teens won’t build a credit history using one.

3. Start a budget

Work with your teens to create a budget. It doesn’t need to be complicated — a simple budget that includes money they have coming in and what they’re spending will do the trick. But make sure they track their expenses, including cash, and compare what they budget with what they actually spend every week or month.

Money Talks News partner YouNeedABudget can help with this process.

If you can instill the habit of tracking income and expenses, you’ve given your teens a skill that will serve them well for life.

4. Open a checking account

Many banks and credit unions offer what are called “minor” or “student” checking accounts, often with lower fees than standard accounts. By opening a basic account with checks, your teen will get accustomed to making deposits and reconciling an account. You can add a debit card tied to the account when you feel a teen is ready.

When you open a checking account for your teen, you have the option to either be a co-signer or let the teen go it alone. Co-signing will provide the opportunity to better monitor the account, but you’ll be responsible if your child overdraws and can’t pay the fees that result. Ask if your bank offers overdraft protection through a linked savings account or credit card.

Not all banks offer accounts to minors. Be sure to check with local credit unions as well. Many encourage young savers.


Source: 6 Steps to Help a Teenager Build Credit