How Do I Build My Child’s Credit Score Before They Turn 18?
We’ll teach you how to build your child’s knowledge of credit and actually build their credit score in four easy steps
Credit is formally defined as the ability to borrow money or access goods or services now with the understanding that you will pay it back or provide an equal service later.
Most of us use a credit card to purchase groceries or pay monthly bills. We may also take out a loan to buy a car, or get a mortgage to buy a house. Once we get older, enter the 'real world' and assume greater responsibilities, credit becomes more important.
The problem is, most of us don’t realize the importance of understanding credit of having a good credit score until we get older. We are never taught much about it in school and for most families, money conversations can still remain taboo.
However, we here at Future Funders believe that learning about credit and mastering the ability to manage it can be one of the most important financial literacy lessons anyone can learn.
We believe there is no reason that this knowledge cannot be taught to our kids as early as possible. What’s more, if taught correctly and you as a parent follow these general steps below (or modify based on your unique situation), there are actually ways to build your child’s credit score prior to them turning 18.
We want to show you how in the following 4 easy steps:
Teaching Kids About Credit And Breaking Down Key Terms
Developing Responsible Credit Behavior At Home
Getting Them Started On Their Own
Helping Your Kids Establish Credit
Let’s get started!
Step One: Teaching Kids About Credit And Breaking Down Key Terms
Before we can do anything, we need to understand the key terms around credit and credit scores as well as how they work. We need to then explain them to our kids in ways they can understanding using methods that can get through to them and help them at least start to grasp the concepts.
As we do explain these terms to our kids and start to teach them about credit, one thing to note is that we feel it is important to no get discouraged if it does not all sink in right away. The topic of credit and credit scores is complex, and there are many different aspects to understand that make it hard even for adults.
Just remember that the cliche saying “practice makes perfect” is true. You may not notice it right away, but as you continue to talk about some of these concepts and principles with your kids, they will grasp the meanings (and likely be well ahead of where we all were at their age!).
Step Two: Developing Responsible Credit Behavior At HOme
In 2019, an interesting study from Harvard University concluded that students learned to grasped concepts better through “Active Learning,” or doing activities for themselves, than they did through “Passive Learning,” or listening to someone explain it to them through demonstration or lecture.
Now it is true that we all do learn differently and one way of learning for on person may not be right for someone else, but the study does highlight how active learning can be a positive for many.
The reason we bring this up deals with our second step in teaching our kids about credit: modeling the right behavior at home.
Now that they have completed step one and understand some of the basic terms around credit, credit scores, and how they work, its time to put some of their knowledge into action and mold them to be responsible with credit.
We wanted to start this at home first prior to moving on to steps three and four because we think that before they are ready for the real world, you as their parent should be confident in their ability to show responsible behavior.
Below we list two simple exercises that you can take them through at home to start to model responsible behavior. In addition, should you and your family love reading or playing board games as a way to introduce concepts to your kids, we also have a handy list of books and games that can teach the topic of credit and start to model responsible behavior at home.
Debit Vs. Credit
Objective: Teaching the difference between debit and credit.
Directions: Go through a list of several hypothetical transitions with your kid and identify whether the transaction is a credit transaction or a debit transaction. You can use a handy sheet we made here and If they get stuck on a particular transaction you can try and prompt them with real world examples. We would also recommend once you go through the exercise to apply it to everyday life when you are out shopping and buying items. As you are buying things, talk about the exercise with your kid and ask them to identify whether what you are doing is a debit or credit transaction.
The Parent Bank
Objective: Teach responsibility with how credit works.
Directions: Parents, when an opportunity arises and your kid asks for something small (maybe a piece of candy or small toy), you can use it as a good way to teach you kid about credit. Explain to them they can borrow money from you to get the item they want, but it has to be repaid at an agreed upon date. If they have an allowance or chores money they can use this to repay you, and if they are younger you can agree on a manual task vs. money. Remember, the most important thing is to have a re-payment amount and date agreed upon prior to lending them the money
If you want to add the digital route to some of the games above, the following are several quick ways to teach concepts around credit and debt
FICO Credit Score Simulator — This is a great free option to go through with your kid to help them understand what can positively and negatively affect your credit score. Click here
Cat Insanity — This is a free and quick game that is a solid way to introduce the effect of compounding on high interest rate debt. Explain to your kid that if you don’t pay your interest, your debt will multiply (which is similar to feeding the cats in the game) Click here
Step Three: Getting Them Started On Their Own
Once we are confident that our kids understand what credit is and how it is responsibly handled, we are ready to apply the concepts in real-world contexts. Like riding a bike, we are going to start them off with training wheels before giving them full access.
You can start by giving your child access to a debit card, prepaid card, or checking account. In most cases, they will only be able to spend what is in the account, and you will have total visibility to track what they are doing
There are many traits and characteristics to consider when choosing a card and the choices can sometimes get overwhelming. We suggest breaking your choice down into four main categories.
Fee or no fee? Some cards carry fees and some don’t.
What features come with the card? With a few different types of features listed in the video, consider what is right for you and your kid.
Are there any parental controls? Some cards allow you to limit spending in certain categories or give you the option to monitor your child's activity.
What are the spending limits? It is important to consider what is best for your child.
Below is a short list of debit, prepaid, and checking account options for you to consider (we list more in our course highlighted below). However, we will be the first to say that if you find one that works better for your situation, stick with it.
The three below are by no means an exhaustive list and instead are just a few we liked based on research and the above criteria. If you find any others that you really like and has helped your family feel free to mention in the comments or shoot us a note here.
We believe that more knowledge is better here at Future Funders and simply want to try to help as many families as possible.
Axos Bank First Checking for kids aged 13-17
Fee: No monthly fee
Features: Earns a small amount of interest; no overdraft fees; ATM fee reimbursements
Parental Control: Ability to monitor the account and receive spending alerts
Spending Limit: $500 daily debit spending limit
Chase First Banking for kids aged 6-17
Fee: No monthly fee, but user must be an existing Chase customer or parent must open an account
Features: Built-in way to list chores and give allowances
Parental Control: Parents can set spending, limit ATM access, and receive spending alerts
Spending Limit: Set by parents
Greenlight with no age requirements
Fee: Starts at $4.99 per month for up to five cards (one per kid)
Features: Spending is split into categories; ability to set up savings and investing account
Parental Control: Parents can set spending categories
Spending Limit: $1,500 per day spending limit per family on the debit card
Step 4: Helping yOur Kids Establish Credit
Now that we've taught our kids about credit and introduced them to a debit/prepaid card or checking account, it's time to give them credit access and help them build their credit score before they turn 18.
While all credit accounts require the account holder to be 18 years or older, there are several ways around this requirement that we lay out below. All of these ways will require your involvement and help your child apply the lessons they have learned by going through the steps above.
However you choose to introduce your child to the world of credit is up to you. As an aside, if you feel your child is not ready to handle a credit card or one of the options below, you can always wait or simply go through the steps on your own and just not give them access to a card itself (this will have the same effect of building their credit without them actually knowing it is being done).
Regardless of your approach, as noted above just know you are giving your kid an advantage that can last a lifetime. By teaching them about credit at a young age and helping them practice how to be responsible with a card or account, they are light years ahead of where most of us were at that age.
Below we list a few suggestions for you to get the ball rolling (we talk about more in our course below):
Personal Loan (co-sign) — Is your kid ready for their first car or do they need help with another kind of purchase where you are thinking of taking our a loan? As a parent, you can act as a co-signer on a loan for your child.
Your child will have to manage the loan and pay it off on schedule, and in doing so, it will give them a credit score before they turn 18 (just make sure you check with your bank that it will be reported to the three agencies).
Credit Builder Loan (co-sign) — If you are not ready for your child to have access to a full loan, you can start off with co-signing what is called as a credit builder loan. A credit builder loan works differently in that the amount you borrow is held in a bank account while you make payments to repay the loan. Once you have repaid the loan, you will get access to the money. For more information, click here.
Existing Credit Card (authorized user) — If you have a credit card you regularly use and pay off, you can make your child an “authorized user” on the account. The bank will issue another card for your child to use (you don’t have to give it them if you don’t think they are ready) and as long as the bill gets paid off every month, this will give them a credit history and credit score.
Make sure that you check with your financial institution regarding any age restrictions (we have a handy guide on the following page for age restrictions at the large institutions) and that the credit card is being reported to the credit agencies. For more information, click here.
Secured Credit Card (authorized user) — If you have a secured credit card or apply for one, you can make your child an authorized user on that account (in most cases). A secured credit card works like a regular credit card -- the only real difference is that the institution issuing the card usually makes you deposit money before you can start using the card.
This deposited money acts as security for the lender, should you not be able to pay off your card. To see more information on secured credit cards to add an authorized user click here.
If you have any questions or have experienced success using other methods (we don’t have a monopoly on knowledge), feel free to let us know in the comments below or shoot us a note here. We are here for you, always. Now go have some fun and take pride in the valuable lessons you have taught you kid!
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