Establishing your teen's credit can be tough when they're just starting out in life. You want your teenager to be able to get a car someday, rent an apartment, or just have their own credit card for emergencies.
Don't we know! Getting our son set up to establish credit was challenging as he kept getting rejected over and over again as he applied for credit cards, both store based ones, or just a normal Visa or Master Card. The problem is it's like a Catch-22. You need to have credit history to get approved for a credit card, and you need a credit card to establish credit history. So, what do you do? How do you help your teen get started? Since we know the frustration of this situation, we offer our thoughts about this, um, dilemma! By the time you finish this article, you'll have a good idea on how to have your teen begin building credit. Here are a few steps to take to help your teen establish credit:
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Although most children do not have credit reports, it doesn't mean they're free from being victims of identity theft. Whether you have a teen or a younger child, getting a credit report is good practice to ensure there is no fraud. Criminals can use a stolen social security number regardless of age. In a way, reviewing your child's report for fraud helps with establishing credit since you can take care of any fraud - which often negatively affects a credit score. If your child is still under 18, you'll need to contact one of the three bureaus to get parental access and to check for fraud. Each agency operates differently, but they will all determine whether your child has been a victim of identity theft. In some cases, it may be errors that need to be corrected, so you'll want to check the report to be on the safe side. Here are some guidelines to each of the three bureaus:
If your child is 18 or older he or she will need to contact the credit bureaus directly since they are legally now an adult.
Once you have determined there are no errors in reporting or identity theft, move to step two.
This will go a long way in helping manage credit. Once credit is established for an teen or young adult, it's enticing to respond to offers that will inevitably appear. Nearly every day we receive offers of credit in the mail. Amazingly some are even for credit cards we own! We have a credit card from our bank. And we get mailings from the same bank offering us the opportunity to get a credit card with them. Strange to say the least.
The point is, we know to not fall into having more credit than we need (part of good financial sense!). We discard those offers right away! And on a side note - we shred them. Throwing them away as is, is a way for someone to get a hold of the offer and open the credit card or credit line using the info about us on the application. I used to think this was far-fetched and being paranoid, until it happened to us for real! Since then we shred everything with any personal information.
Back on track here - educate your teen about interest rates, why minimum payments are bad, why maxing out a credit card is bad, why too much debt is bad (okay - enough of the bad stuff). Also educate about why credit is useful for the right reasons, and how to manage debt. Do research on these matters if you need a better idea about it all before teaching your teen about it.
While a checking account does not contribute to a credit score, establishing a relationship with a bank may lead to getting approved for a credit card when the time is right. In the USA, you need to be 18 years old to get a credit card, yet just being of age does not mean you are guaranteed anything. A bank that you've been a member of for years will be more likely to give you a credit card or loan. That's exactly what we did. Got our son a checking account with a debit card. No problem opening that account since there is no credit involved. Also at the time he was under 18 so this was the only option for him to learn how to manage his finances.
This is a major milestone in one's financial life. Some parents get worried at this point. Others are proud. If you provided a good financial education as noted above, this is a special step on your child's road to adulthood and independence. As said at the start of this post, our son received all rejections from applying for credit cards. Then we looked into a college credit card. These are offered by many large banks (they have their own agenda - a future customer!).
Obviously our son was in college. He applied for a college credit card and it was approved. And we noticed an interesting thing - his credit score is quite high! Higher than most people. We inquired at the bank about this. Turns out this is a plan they follow. They start a college student at a high credit score, and then over time, the occasional late payment or going over the limit lowers the score into reality. I don't quite get the point of this. I suppose it's based on statistics of how financially young adults are and how they manage credit. But no complaints here.
No idea if all banks follow this, however ours did.
We did a good job educating our son! Here's why - when the credit card arrived, our son devoured all the information - what is the interest rate, is there an annual fee, what is the grace period, etc. etc. I think I was more impressed by this than the fact that he was approved for a card.
By the way when he applied for the college credit card, he was told if he got rejected there were two good options:
A secured card is a great option as well if your teen is not in college. Since this is not a college credit card, there is no requirement to be in college. All that is needed is to provide to the bank the secured amount to back the card with. This can apply to anyone, not just college students. As noted we were told using a secured card helps establish credit. However we hear that this is not always the case. You need to check with the financial institution you are using. See what their policy is about this.
Another way to help your teen establish credit is to place him or her as an authorized user on one of your credit cards. They don't even need to use the card in most cases. Just being on your account will give him or her a good start.
An alternative way to start establishing credit is to take out a loan and pay it back (all payments on time of course!).
There are a couple of other new ways to establish credit that most people don't know about. First is a company called They have an app that when used works as a credit source. Read the information on the website to see if this is a good option. At the time of this writing they only operate in Utah and California.
Another option, Self Lender, has an interesting concept where you make payments for 12 months to a holding account. At the end of the term, you receive back all the money you paid into the account, plus a small amount of accrued interest. Then the company reports to one of the three bureaus. This establishes credit and also teaches about saving. The money is put into a CD (Certificate of Deposit). Payments must be made monthly for the year. Then upon successful completion your funds are at your disposal (your child's disposal). This is similar to a traditional CD, except you fund it over the course of a year. Visit the website for more information and see if this is right for you and your child.
With careful planning, you can help your teen establish good credit so they can enter adulthood with the ability to purchase a car, lease an apartment, or successfully pursue other pursuits in which a show of good credit history is a necessity. One tip for success is to have your teen/young adult work part-time when using credit. There's no sense in applying for credit if there's no way to pay it back. Teach him or her the basics of bill payment before they launch into this new phase to make it easier for them to transition into adult life.
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