This post was sponsored by Lexington Law. All opinions and writing is that of Daily Mom.
It may be something far from the reaches of your mind, but one day your child is going to be getting ready to move out of your house. Despite your best efforts to keep them little, they will one day be heading off on their own. They will become adults, needing to purchase items like cars or homes. It is a scary thought for a parent, as it's hard to believe the preschooler who won't let go of your leg at drop-off will one day be a full-fledged adult.
But that day will come sooner than you think, and as parents it is our job to ensure that they are ready to leave the nest. We want them to be independent, critical thinkers who can be ready to make tough decisions without us being around to give them direct guidance. We want to make sure we can set them up for their future by teaching them valuable skills and knowledge as they grow older. However, one of the things often overlooked by parents is setting their children up to be financially successful before they hit the road.
This doesn't mean paying for everything or going with your child to their interview for a new job. There is one thing that most parents forget their child will need before they are able to successfully live on their own- credit. Without credit, your child won't be able to rent an apartment or purchase a car. If they will be taking out student loans, a good credit score will help them get better rates of interest. And one day, when they make their first home purchase, they will need credit to show the lenders.
But how can you help build credit for your child before they are old enough to truly be financially responsible? Let's use an example. Let's say you have a teenager who is starting to be a little more independent. They are getting ready to have their own driver's license, and they are spending more and more time with friends (all while you cry out, "Make it stop!!!"- in your head, of course). In both scenarios, your child is responsible for paying for their own "wants"- going to the movies, buying a new gaming system, getting accessories for their phones, etc. Your child has a minimum wage-paying job to help pay for these items, and it is their responsibility to save for the things they want.
In scenario one, your child uses cash (or a debit card) to pay for everything. You help to monitor their financial responsibility, but otherwise they are free to spend their money how they deem fit.
In scenario two, you get your child a credit card tied to your account. You encourage them to monitor their use of the card and to keep track of their spending, and at the end of the month you sit down to calculate their amount. They pay your from their savings for their portion.
Most parents might think, "Why in the world would I want to get my teenager, the person who forgets to wash their own underwear, a credit card?" However, building up your child's credit is one of the best things you can do to financially prepare them for their future. It allows them to be able to walk out of your home and become completely independent. And a good credit score will help them secure lower rates and give them the opportunity to purchase higher quality items.
Let's take the two scenarios above. In scenario one, your don't do anything to help build your child's credit. They leave the house and get ready to secure an apartment, only to find out that no one will rent out to them because they have no credit. They get their first credit card, and the rates are astronomical. When they go to take out a student loan, the rates are high ensuring that they will forever be paying back the bank. They quickly find themselves in debt (and with lower credit scores) because they haven't learned how to monitor their spending.
In scenario two, your child goes out into the real world with a decent credit score. They are able to get their own apartment, purchase a new vehicle, and get a great rate on their student loans. They carefully monitor their spending out of habit from years of doing it before, and they know what to look for when choosing a credit card of their very own. Years later, after being very careful with their finances, they get a lower rate on their home loan because of their fantastic credit score.
How to Build Your Child's Credit
But how can you build your child's credit before they are old enough to be financially responsible for their own credit card? Lexington Law, one of the oldest and most respected names in credit repair, states that there are two main ways you can build your child's credit before they leave you forever (just kidding, take a deep breath).
- Add them as an authorized user: Many credit card companies will allow you to put your child on your credit account as an authorized user. This allows your child to have a card of their own and they learn how to monitor their spending, all while falling under your ultimate responsibility so that you can ensure their credit score doesn't drop from unpaid bills. This is a great option if you have a good credit score yourself and you want to help your child build a good credit score under your supervision.
- Get them their own credit card: If you are reluctant to add your child to your own credit history, you can get them their own secured credit card. However, this puts all the financial responsibility on them, making it more likely that they will dip their own credit score if they can't pay the bill.
Lexington Law notes that it is important to keep an eye on your child's identity- even if they don't have a credit card. You can contact any credit reporting agency like EquiFax, Experian, and TransUnion to get a copy of your child's credit report (if under 14 years old, you can do it. If over 14, they have to do it). If they don't yet have a credit card and a credit report is able to be pulled, then you know that their identity has been compromised. In addition, if you start receiving credit card advertisements for your child, this may mean their identity has been stolen. Once your child does have a card of their own, either as an authorized user or independently, it is important to continue to check their credit through one of the services above or through a credit or identity theft monitoring service like that provided by Lexington Law. And if you do find identity theft or another error on your child’s credit report, credit repair from Lexington Law can help.
Prepare your child before they leave the nest by building up their credit and teaching them financial responsibility. It is one of the best things you can do for their financial future.
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