Ways to Help Your Teen Establish Credit

January 09, 2012

Schools teach our children so many things like history, science, math and social studies. However, many institutions overlook other crucial life skills like personal finance, credit and savings. Imparting these lessons now fall on you, the parent. Here are a few ways you can help and teach teens about establishing credit.

Open a bank account in your teen's name

To build credit, your teen first needs to establish a history of financial responsibility, and this is done by opening a bank account—either a savings or checking account—in their name. Let your teen get used to regularly depositing and overseeing the account. While it’s their money, you should also teach them how to spend it wisely. And if they overdraw, bounce cheques or incur any other fees, it’s their responsibility as well.

Encourage them to get a job

When your teen is old enough, encourage them to get a job so that they can earn, save money, establish a steady source of income and understand the value of money. Teach them that reliable income is necessary for building credit, applying for a student loan and paying off a credit card (more on this later).

Place a utility bill under their name

Putting a utility under your teen’s name a great way to give them hands-on practice in paying something regularly and on time. You can let them handle your petrol, electricity, telephone or internet bills. Of course, you face the risk of having one of your basic utilities disconnected if your teen forgets. Then again, it’s a great way to teach them the consequences of their action (or in this case, inaction).

Have your teen apply for a credit card

This is a crucial step because any blunders can be expensive. Before you proceed, make sure your teen is responsible enough and financially ready for a credit card. Has your teen been consistent and on time with the utility bill? How is the savings account going? The part-time job?

There are several options for your teen:

  • A retail credit card
    As its name suggests, these credit cards are issued by retail stores. Like a regular credit card, they earn reward points when shopping at the store. Retail credit cards are great for teens because they have low credit limits, but take note that they also have high interest rates.
  • A secured credit card
    You can also opt for a secured credit card for your teen. They're ideal for building credit but you have to make a cash deposit to use it. You can also have your teen apply for a prepaid credit card, but since you're using up the money loaded in the card, it won't build up your credit score.
  • A supplementary card
    Here's an even easier option: get your teen a supplementary card, which makes them an authorised user in your account. You'll share the credit limit, but at least you can still monitor your teen's spending. Best of all, your teen gets the credit history and the benefits of the card.

Co-sign your teen’s student loan

If you have a good credit score, you can co-sign your teen’s student loan. This would allow your teen to further establish their credit. As with any loan, what’s important here is that your child pays on time once done with uni or both of your credit scores will take a hit.