4 Ways to Help Your Children Build Credit

Helping your children build credit is an often overlooked area of personal finance.

The reasons are varied.

We neglect these lessons because we are otherwise focused, for example, on the important tasks of saving for a down payment on a home or for retirement.

The credit building process also can cause concern. Parents sometimes are leery of encouraging their children to take out debt, worried that the youngsters may let it get out of control or waste funds on excess interest.

These valid hurdles unfortunately too often result in young adults with no credit history and no sense of how to use debt wisely to build wealth.

Four credit building options

It is easy, however, to clear these credit lesson challenges.

Here are four ways that, in addition to helping your child build a credit history, also teach your child about debt management.

• Help your child obtain a credit card in his or her name. This is not the same as setting them up as an additional user on your account. Start with a small credit limit ($500-$1000) and allow the young card owner to practice charging items and paying them off each month.
• Make your child responsible for some bills. When your child gets a first apartment, make sure one or two of the utilities are in his or her name. Don’t put them all in your name or a roommate’s name. If you're concerned that your child might overlook paying the bills, consider setting up automatic payments.
• Obtain a car loan in the child's name. When it’s time to purchase a car, have the child take out a low interest loan from an outside bank. Resist the temptation to take a loan from the child’s trust in order to save money on interest; this will do nothing to help the young person build credit.
• Have your child contribute to college costs. Even if you’re planning on paying cash for your children’s college expenses, consider having your child take out one or two small loans and make payments for a few years. You can eventually pay off the loans on your child's behalf if you wish. But until then, the process can be a good teaching opportunity and credit builder.

Avoid credit card wolves

These real-life credit experiences are wonderful lessons, but when it comes to credit, you don’t want your child to be "thrown to the wolves." Credit card companies line up at the perimeter of college campuses, literally handing out candy and t-shirts to entice young people to sign up for credit cards.

Make sure your son or daughter knows the danger of credit cards and how compound interest can multiply the cost of even small items if you carry a balance.

Additional credit lessons

Also teach your children about debt management and how monthly payments on consumer and student loans can quickly eat up budgets.

Show your child the power of paying cash for items or accelerating debt payments to save significant amounts of interest.

By the time your son or daughter is ready for more advanced financial steps, such as purchasing a home of his or her own or taking out a loan to start or grow a business, the credit lessons you have taught will ensure that your child is well on the way to using debt wisely and efficiently growing personal wealth.