How to Build Credit – Your Complete Guide

Many times, kids don’t worry about building credit until they’re off to college – or even after they graduate. Our society hasn’t historically set kids up for success, because they can’t even begin to build credit until they’re well into their teens.

Here’s your complete guide on how to build credit.

When kids are young, they aren’t worried about building credit for purchases they’ll need or want to make when they get older. It’s only when they go to apply for a loan or decide they’re ready to rent an apartment or buy a home that they realize they should have already begun building their credit – or learning the skills necessary to do so.

This is where we, as parents, can help guide and prepare our kids from their younger ages, and help them understand how to build credit for the very first time.

What makes up a credit score?

A credit score is comprised of various factors that each credit bureau takes into consideration in a slightly different way. And because there are multiple credit bureaus (Experian, TransUnion, Equifax) with many different scoring models (VantageScore, FICO) it can be a very daunting process to understand exactly what financial moves will affect your credit.

A credit score takes into consideration the following five categories:

• How long your longest accounts have been open
• Whether you have any late or outstanding payments
• How much debt you have compared to how much credit you have available
• What types of credit accounts you have open (loans, credit cards, etc.)
• How many times your credit has been pulled by creditors

How long does it take to build credit for the first time?

Unfortunately, building credit – and building good credit – doesn’t happen overnight. We all start off our credit history with no credit. And getting to a perfect score of 850 seems like a monumental task – especially if you have no idea where to start.

We all have to prove to the credit bureaus that we’re worthy of good credit, and that we’re financially responsible. But there are things you can do to help your kids build good credit right off the bat:

How to build credit

Add your child as an authorized user on your credit card

This one can feel a little scary for parents. Kids don’t always have the best self control, right? So it’s hard to give them some leeway with our hard-earned money. But as long as you stick to some ground rules from the beginning, adding your child as an authorized user on your credit card can have a lot of benefits.

Set a monthly spending limit for your child, and watch your account like a hawk. After all, it is YOUR hard-earned money. Depending on your financial institution, you may even be able to set up alerts to know if your child has overspent or if something looks fishy. But adding your child to your account can help you teach them that money really doesn’t grow on trees and that credit cards are not free money!

Co-sign on a loan for your child

When your child is in high school and turns 16 and wants his or her first car, one option at your disposal is to co-sign on a car loan. While buying a car for your teen may not be financially feasible for some – or while you may balk at the idea of co-signing on a loan for your child at such a young age – keep in mind that doing so can also teach your child about having real responsibility, while helping them build their credit before even entering college. Helping them learn early, will help them throughout life.

Similarly to allowing your kids to use your checking account, you’ll need to stay on top of them to make sure they don’t get into a situation where they can’t pay back the loan – or that you can’t pay it back if your child can’t. With proper planning, though, many find success in this.

Open a retail store credit card (but don’t open many of them)

Browse through some large retail store credit card plans to see what might be a good ft for your child. One tip is to choose a retailer they might want to shop with even as they get older. This is because you don’t want your child to only use the card for a couple of years, stop shopping at the retailer, and then never use the card again. Credit cards should be chosen wisely and with care, because the card on your account that stays open the longest and which gets some use, will carry more weight in benefitting your credit score. Conversely, if you shut down your oldest card, it can negatively affect your credit score.

Open a student credit card

Student cards may be an option for those with no or little credit history. While they may come with higher interest rates and require balances to be paid in full each month, they’re a great way to allow kids to start building credit, and will allow them to gain higher spending limits down the road as they prove themselves worthy by using the card responsibly.

Ask for higher spending limits

As your child builds their credit and gains more meaningful employment, have them ask for higher spending limits. Every six months or so, have your child call the credit card company or go online and apply for a higher spending limit. They’ll have to show their current income, but if they’ve been using the card responsibly, they might find that the creditor will grant them access to higher spending limits as they spend responsibly and earn more income over time.

In Closing

All in all, it can take years to build good credit. A rule of thumb in the credit industry is that it can take three years of credit history to build good credit. So – as with all of our financial advice – help your kids start building their credit as early as possible, so they can take advantage of the best interest rates and financial products available that they’ll want to have down the road.

For further reading on the topic, check out All About Credit, a nice resource.