Planning matters

Is Your Teenager Ready to Start Building Credit?

My daughter, who will soon turn 18 years old and is in high school, asked if she can apply for a credit card. For the past few years, she has been utilizing a high school checking account. This has provided her the opportunity to learn how to responsibly use a debit card, keep track of her checking account balance, and understand the importance of saving. Now the question that comes up is when and how do we help her start establishing credit under her name, since this will play an important part of her financial footing as she enters adulthood.

When it’s time for your teenager to start building their own credit there are several things that should be considered, including providing education on how credit cards work, as well as your teenager’s responsibility level and spending habits. Having a good plan and choosing the best option for your teenager will benefit them in the future when the time comes for them to apply for a loan or apartment, or if they need credit history for employment.

First and foremost is providing your teenager with education on how credit cards work. Some of the important factors to understand include:

  • The difference between a debit card and a credit card
  • The difference between revolving credit and installment credit
  • What credit interest is, the rates and how to avoid or reduce interest paid
  • How sustaining a good credit score will benefit them in the future
  • The consequences of a poor credit score and carrying too much debt
  • The importance of paying their bills on time and to spend below their means
  • The danger of opening more credit cards than they can manage

Once you feel your teenager has shown they are responsible and ready for a credit card, you’ll need to determine the best method to help them start establishing credit. There are many different options available to do this, however, we will explain only two  below:

  • Add your teenager as an authorized user on your credit card – Contact your credit card company to inquire if they will allow you to add your teenager as an authorized user on your credit card, and if so, confirm their terms for doing so. Make sure they report authorized user accounts to the credit bureaus to ensure your teenager will have the history recorded on their credit report. One thing to keep in mind is if you remove your teenager as an authorized user before they can open a credit card in their own name, the credit they built will most likely be removed from their credit report. Therefore, it’s important they establish a credit card under their name prior to being removed as an authorized user on your card. Also, as the primary card holder, you are liable for paying the credit card debt, not your authorized user. If you choose this option, you will want to keep a close eye on your teenager’s spending and establish any necessary controls.
  • Open a secured credit card – Another option to consider is opening a secured credit card for your teenager to use. This requires an initial deposit which serves as the credit limit. By utilizing this option, your teenager will have their own credit card with a set credit limit, which will help prevent overspending and bring peace of mind. Once they are ready to transition to a regular credit card, the deposit on the secured credit card is usually refunded. When considering this option, be sure to confirm any fees that may be associated with the card as well as the interest rate, which is generally higher than an unsecured card. Also, be sure to confirm the credit card company will report the payment history to the credit bureaus.

Take time to research the various options that are available for establishing credit and weigh the advantages and disadvantages of each one to determine which is the best fit for you and your teenager. Once your teenager has started down the road of building credit, be sure to show them how to access their credit report to make sure it’s accurate and nothing fraudulent is being reported under their name.

Providing your teenager with financial education and guidance on how to properly use credit cards will help them develop good habits so they will be successful in managing this important part of their finances in the years to come.

Written By Lana Alvarez