One of our primary responsibilities as parents is to teach our children lessons that will serve them well in life long after they reach adulthood.
Like establishing healthy eating and exercise habits, one of the most valuable lessons we can pass on to our children is to help them take care of their finances. If they’re young, you might want to start with the basics of budgeting and saving, which are central to building financial discipline. As they get older, it’s also important that children are taught how to build and maintain good credit. Credit is inherently complex, but the building blocks of solid credit are actually quite simple. Here’s an introduction to help your kids get started on the right foot:
1. Make your child an authorized user of one of your credit cards.
This can be done before your child is able to get their own card so they can use the card for their own purchases. You are still responsible for paying credit card bills, but your child’s credit may benefit if it is linked to your strong credit score. It can also serve as a first test of how your child handles credit. Expect them to be responsible for paying you back any fees incurred.
2. If possible, let them build their own credit.
The time will come when your children will qualify for a credit card. Again, it’s important to emphasize the importance of paying bills on time every month. Ideally, they pay off the entire balance monthly to avoid high interest costs. You also need to make timely payments on other debts like student loans, credit cards, and even expenses like utility payments. Note: Using a debit card does not help build credit.
3. Encourage them to exercise caution when using credit.
Achieving good credit is a balancing act for younger people. They must receive and use credits to collect a story, which is reflected in their score. Still, they want to avoid overdoing it. Make sure your child knows not to take chances, using loans to pay for large expenses that could require a long payback period, or accepting more than one or two credit cards at a time.
Dealing with credit is a new experience for most people just entering adulthood. By following these steps, you have an opportunity to get your kids on the right path.
Holley Smaldone-Cragg, CMFC, is a financial advisor at Ameriprise Financial in Geneva. She specializes in fee-based financial planning and wealth management strategies and has been in the practice for over 35 years. Their website is ameripriseadvisors.com/holley.com.