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As early as when your kids are juniors in high school, you should urge them to start building credit.
Think that’s too soon for them to accept the responsibility? You may want to think again, Bill Hardekopf, chief executive of LowCards.com, tells CBS MoneyWatch.
“It worked really well for us,” he said. “Our kids are all financially responsible and had five years of credit history when they got out of college and started applying for loans. That gave them a real advantage.”
Sounds great, but how can youngsters establish solid credit histories? Here are four simple starting points:
1. Walk kids through the basics
Don’t assume kids understand credit fundamentals. Missteps with credit can haunt people for years.
Even if kids seem resistant to hearing about key credit lessons — like the importance of on-time payments and impact of carrying high credit-card debt — have the conversation periodically and have faith that they will be listening at some point. Understanding credit is a life skill.
2. Allow teens to use credit cards you monitor
Prior to 2009, teens could obtain credit cards more easily. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 changed that, notes CBS MoneyWatch. Now teens must be added to parents’ accounts, have a parent co-sign for a credit card, establish an account at a bank that offers low-limit credit cards or obtain a secured credit card.
Whichever route teens take, make sure you’re able to monitor activity on the card. Doing so allows you to ensure your teen learns solid practices such as keeping credit card charges low, regularly paying charges in full and routinely sending on-time payments.
3. Don’t let them walk away from gym memberships (and the like)
The myriad of available gyms makes it all too easy to enroll. The problem is that when people don’t follow the cancellation policies, it can hurt their credit scores. Teaching Junior to read the fine print of all contracts, especially in the rush of enthusiasm to sign up, will save him headaches down the road.
4. Remind them that credit is a long-term commitment
Maybe your teen doesn’t want to remember her indulgences at a clothing store, so she cancels the credit card. But that can cause problems, as we explain in “12 Surprising Ways to Wreck Your Credit Score“:
“Closing a credit card account sounds smart, but it can hurt your credit score. Losing a portion of your available credit increases your credit utilization ratio, which accounts for 30 percent of your credit score. An increase in this ratio has a negative effect on your score.”
Urge your kid to keep credit lines even if they’re not using them to demonstrate a long, well-earned credit history.
To learn more about helping your kids build a strong financial foundation, check out “6 Lessons That Turn Kids Into Money-Savvy Adults.”
What tricks and tips do you have for helping young people develop good money sense? Share with us below or on our Facebook page.