Teach your Children Well-Part 3: Give Your Kid’s Credit

Young adults are making a big mistake with their finances. Survey after survey reports that most millennials do not have a credit card. I am wholeheartedly on board with preferring a debit card. But everyone needs to also have a credit card and use it responsibly.

One of the most important tools you can have in your financial tool kit is a strong FICO credit score. You can be the most responsible debit-card user on the planet and it will do nothing to help you build a credit score. As absurd as it is—and yes, I do think it is absurd-one of the best ways to build a credit score is to use a credit card. The three major credit bureaus all factor in your credit card payment track record-do you pay on time?-into their FICO credit scores. And how much of your available credit that you use in any given month is another important factor in determining a FICO score.

Of course, without some solid guidance, a young adult can make a mess of his or her financial life by running up way too much credit card debt. So my dear parents, your job before a child moves out is to make sure they have aced smart credit card habits:

Add a young teen to your card. A child can be added to an existing credit card account as an authorized user. Consider this the training wheels step. Have your child use the card once in a while for an agreed-upon-expense. And then make it a ritual to sit down and go over the credit card statement every month, spending some time explaining the trap of just paying the minimum balance due.

When a child is added as an authorized user, they will begin to build a credit profile based on your account. That can be a great help if you in fact have a high FICO score. But keep in mind that a new version of FICO scores differentiates between someone having their own account and someone being an authorized user. Authorized usage gets less weight in the FICO scoring system. This new scoring system isn’t yet widely used, but it’s something to keep in mind. Sooner than later you probably want to consider graduating your child to their own credit card.

Co-sign a Regular Credit Card, or a Secured Card. Minors who don’t have ongoing income can only get a credit card if an adult co-signs. A no-fee credit card with a very low credit limit can be a smart way to help a high schooler build a credit profile based on their own record (rather than as an authorized user on one of your cards.) But this requires care as well. The potential danger is that a safe initial credit limit of say $1,000 or so is suddenly increased by the card issuer (or your overzealous child asks for a higher limit) and some hefty charges are made. That can be an expensive lesson all around, as you are ultimately responsible for paying off all bills.

Another option is to have your child apply for a secured credit card. Secured cards require a deposit, and the user can only charge up to the amount of the security deposit. That’s a surefire way to stay out of over-spending trouble. Most secured cards report a user’s spending and payment habits to the credit bureaus, so they will indeed help a child build a solid credit file that will eventually translate into a good credit score. But it is smart to double check that any secured card you child applies for will indeed be reporting to a credit bureau. You can shop online for secured credit card deals. Many issuers charge an annual fee of $25 or so, but there are also deals with no annual fee. Shop around.

Teach the Golden Rule of Credit Card Management. Even if you carry an unpaid credit card balance from month to month, please don’t let your child think that is in fact the “best” practice. Teach your child that the smartest way to build a solid credit profile and retain financial freedom is to only make charges that they can always pay off in full each month. Developing this good habit from the get-go could be one of the most valuable financial lessons a parent can teach a child.