In order to teach your children to build good credit, you will have to first educate them about the concept of credit scores and how these scores impact their finances. The law pertaining to credit cards and loans is subject to change every year. It's therefore beneficial for you to be aware of these laws and pass on this valuable information to your children so that they understand how to better manage their finances. Here are five ways to teach your kids to build good credit:
1. Lend Money to Your Kids
Even before your children move out of your house and live independently, there are a few things you can do to instill good financial habits in them. If they ask you to buy something they need, you could lend them the money and make them repay the entire amount to you in the form of installments. Make sure you explain the procedure of repayment to your child. You could also set a particular date every month for your child to make the payment to you.
2. Add Your Child to Your Credit Account
If your child is about to start living independently, he may have trouble renting an apartment or getting a loan for a car because of his poor credit score or no credit history. To give him a head start, you could add him to one of your credit accounts. Although your child may be authorized as a user on your credit account, you could prevent him from using your card so that your account isn't misused.
3. Stress Importance of Making Payments on Time
You must teach your child about the importance of making payments on time. You could get your kid to pay telephone or utility bills on time, or get him habituated to making timely payments at retail or department stores. Getting a card from a retail store is a lot easier than getting one from a credit card company. If your kid learns to pay these retail card bills on time, he will learn to manage his finances and build a credit score that would qualify him for a credit card from a bank.
4. Teach about Debt
Even if you do all the things mentioned above to help your child build a credit score, staying out of debt is one of the most important ways to build and maintain a good score. If your kid earns a few bucks at a Summer job, try to get him to open a savings account at a bank and save at least 10 percent of his salary. Also tell him how to work out a budget for his expenses so that he spends money by keeping this budget in mind.
5. Do Your Research
Banks generally offer products for students or people with no credit history. Find out more about secured credit cards and their interest rates. Since secured credit cards come with a high interest rate, you should also find out about unsecured credit cards that are offered to students.
By following the guidelines listed above, your child will learn the importance of good financial habits and building a credit score. You should also get him to review his credit report periodically so that it remains accurate. This will help him qualify for loans in the future.