Building credit is vital to being able to borrow at an affordable rate. Having a strong credit history not only enables you to have your choice of loans but can make renting easier and reduce auto insurance rates. Many employers also check credit, so even job prospects can be affected.
It's a good idea to start building a strong credit history as soon as possible. For members of Generation Z — currently 0 to 24 years old — it's never too early to start. The good news is, parents can do a lot to help them get off on the right foot when it comes to building credit.
Here are six ways that parents can help Gen Zers start building credit now.
- Teaching budgeting basics
- Helping them open a credit card
- Adding them as an authorized user
- Cosigning a loan
- Opening a savings account
- Explaining key credit score factors
1. Teaching budgeting basics
A solid budget is key to responsible borrowing, so parents should focus on helping children of all ages learn early how to manage their spending. This will enable them to avoid going so deeply into debt that their credit is damaged because of irresponsible borrowing behavior.
There are a variety of budgeting techniques to teach kids, but the 50/30/20 budgeting rule is one of the simplest. It involves keeping fixed expenses to 50% of income; saving 20% and using the remaining 30% for discretionary spending.
2. Helping them open a credit card
Opening a credit card is one of the best ways to build credit, as using the card and paying it off each month will develop a positive payment history.
In general, young people cannot get a credit card until they are at least 18 — and, sometimes, it's difficult to get approved for credit even then, as card issuers may be reluctant to approve a young person for a card if they have no credit score or a limited income.
Parents can work with their children to explore secured card options or student card options. The best way to find them is to visit Credible's online marketplace to view secured card options or explore other cards that may be available to new borrowers.
3. Adding them as an authorized user
Generally, it's not possible to open a credit card until reaching the age of majority, which is 18. However, parents can add children onto their own cards as authorized users even when their children are very young. In fact, in some cases, there is no minimum age to add a card issuer so it's possible to add a child soon after birth.
When a child is an authorized user on a parent's card, the card shows up on the child's credit history. This can raise the child's average age of accounts, as well as showing a low utilization ratio and a positive history of on-time payments. Of course, parents should only add children to cards as authorized users if they've paid those cards on time and keep their balance low.
4. Cosigning a loan
Having a mix of different kinds of credit can result in a higher credit score, but young people often face challenges getting approved for loans. Parents may wish to consider cosigning for auto loans, student loans, or personal loans for their kids.
You can save money by choosing the right private student loans — and Credible can help. With these free tools, you can compare rates from eight different lenders within just minutes.
Credible can also help you explore personal loan options. Use Credible to compare personal loan rates and find personal loan lenders that allow you to add a cosigner to your application.
Remember, cosigners are legally responsible for payment if the primary borrower defaults, so make sure children understand the importance of on-time payments before cosigning.
5. Opening a savings account
Opening a savings account is key to learning to follow a budget and put money aside for a rainy day. With money in a savings account, Gen Zers will also be able to avoid going into debt to cover emergency expenses and will ensure they don't end up unable to pay back a loan because of insufficient funds.
Of course, it can take time to build up a hefty savings account balance that protects against catastrophic expenses. The good news is, children can start early. And no matter how much money is available to deposit, high-yield savings account options from Credible can make it easy to set aside extra cash and earn interest at competitive rates.
6. Explaining key credit score factors
Finally, young people need to understand how their credit score works and the types of actions that can both hurt it and help it.
Before you open any new credit cards for yourself (or your child), check Credible. Credible can help you compare credit cards and maximize perks you receive every time you swipe.
Parents should explain the positive impact of paying on time, having a mix of different kinds of credit, maintaining a reasonable credit utilization ratio, and having a mix of different kinds of credit. They should also warn against the dangers of closing old credit cards or charging too much on cards, as these factors can lead to a credit score decline.
By helping members of Gen-Z to learn about credit and to gain access to it early, parents can set their children up for financial success.