Monday Motivation: 5 ways to help your child build their credit score

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motivationmondaysmOne of the first things newly independent adults often need is a credit history so they can borrow money – to finance their education, a car, or even a home. And the better their credit history, the easier it is to get a loan, and just as important, the lowest interest rate possible.

[Free Resource: Check your free credit report and score]

But how do you build that credit history?

Here are some ways to help your child build up their credit score:

1. Teach them about credit. Explain the concept of credit to your child, and how lenders are more willing to loan money to people who have a proven track record of paying off their debts. Thus, a good credit history – i.e., a history of making required payments on time – is critical to building a high credit score. And explain the benefits of a high credit score, not least of which is the most favorable interest rate.

2. Open a bank account in your child’s name. Ownership of a bank account by itself does not affect your credit score. But learning to manage a bank account is one way your child can learn to manage money, which will help them manage credit when they are older. Also, children should learn to keep a positive balance in a bank account, since a negative balance that is turned over to a collection agency can negatively affect one’s credit score.

3. Co-sign a loan with your child. If you are willing and able, co-signing a loan with your child can help build their credit quickly. In fact, my dad co-signed a car loan for me when I was in law school and we paid it off. A few years later, after I’d gotten married, my husband and I were looking to buy a new car – and the bank where I’d gotten the loan with my dad was more than eager to extend me a new loan because I had a proven track record when it came to paying off a car loan. But be aware of the risk – you’re putting your own credit on the line when you co-sign, so don’t take out a loan if you won’t be able to cover the payments in the event your child stops making them.

4. Help them get a credit card. Having a credit card and making at least the minimum payment each month is a great way to build credit. But make sure your child considers more than just the picture on the front of the card, and chooses one that has no annual fee and offers some benefits like cash back. Also, make sure your child understands the significance of carrying a balance from month to month, and the difference between carrying a balance and paying it off each month.

You may want to consider allowing your child to be a joint card holder with you, so that you are both responsible for paying off the balance. (This may also be the only way for your child to get their first credit card.) Alternatively, you might consider a secured credit card, which requires your child to make a deposit to the issuing bank, which then limits the line of credit to the amount of the deposit. Just note that secured credit cards often come with high fees and high interest rates, and not all issuers report to the credit bureaus (so they don’t affect credit scores).

5. Teach your child to check their credit history. You can request credit reports from many sources, including Quizzle and AnnualCreditReport.com. Show your child how to obtain their credit report and how to review it for incorrect information that could damage their credit history. The three major credit bureaus (Equifax, Experian and TransUnion) don’t maintain credit files for minors, but criminals sometimes use a child’s social security number to commit credit fraud. You can request a credit report for a minor by contacting the credit bureaus by mail.

[Free Resource: Check your free credit report and score]

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Cathy is the founder of Chief Family Officer, where you can get daily updates on the hottest deals, and tips to achieve financial freedom and family bliss.