Why You Should Help Your Teen Establish Credit

With all the pressures of doing well in high school, many parents help their teenagers with homework and juggling after-school activities. Most parents never even think about their teenager's credit as another step in preparing their teenager for a strong financial future. However, you can help your teenager establish credit and learn about responsible money management.

Our son just bought his first home at 21. He purchased a three bedroom home with three apartments, which will make the mortgage payment, near his college. He was able to buy a home for forty thousand under the appraised price, get a low interest rate, finance the closing costs, and pay no money down. How could he possibly do this? His credit score is over 700.

You can help your teenager prepare for his or her financial future by establishing a high credit rating. Help your teenager with these three crucial credit tips for a strong financial future:

1. Start early. Begin by successfully managing a checking account, the first credit requirement. Wells Fargo Bank has a program for children to open joint accounts with a parent as young as 13 years of age. For a free individual checking account, Washington Mutual requires a minimum age of 18 or a manager's approval for younger account holders.

2. Apply for a major credit card at 18. It's easier to get a first-class credit card with favorable rates and terms while a student attends college before the age of 22. Why do banks want to open accounts for students who have no credit history or employment? Because lenders know that college graduates in general make more money and also pay their bills on time. Also, most consumers don't like shopping around for credit and tend to keep their credit accounts. Therefore, lenders desire to establish strong relationships with the preferred market early in their credit experience.

This doesn't mean that you as the parent need to co-sign; banks expect parents to help out with the payments when necessary. Just be crystal clear with your child what you expect regarding debt management. The purpose is to teach responsibility and to establish credit, not to go into debt.

3. Manage the credit card account with credit scores in mind. Once the account is opened, encourage your child to use the card for necessities that would be purchased with cash, not luxuries, and to pay the debt before finance charges accrue. However, don't pay the entire balance off each month; let a little roll over at least every two months. Banks don't appreciate accounts paid in full each month. More important, paid accounts don't factor into the credit score as much as an account with a low balance.

Explain to you teenager that the purpose of using a credit card is to establish good credit. To do this, a credit card should never have a balance over 50% of the available credit. The best credit scores have accounts with only 10% of the credit line used.

Setting up a checking account and a credit card account helps your teenager learn about responsible money management, with the bonus of building strong credit to finance a home.

Copyright (c) 2005 Jeanette J. Fisher All rights reserved. (You may publish this article in its entirety with the following author's information with live links only.)