And what is the best way to do that? Should I get them their own credit card? Add them as a user to mine?
You are on to the right track. I was able to secure a junior credit card at just age 17 with my father as a cosigner. My credit quickly escalated over the following 2 years to the point where I was receiving multiple credit offers. Get them a card in their name, with you as a cosigner, and monitor the activity (at least initially). Once they build sufficient credit, they can get their own card.
John, in addition to helping your child establish and manage credit, be sure they are learning how to budget and save. If they are setting aside money for the things they want and they have a small emergency fund, they will have little need for credit. Encourage them to build up their wealth and not to dig a hole with debt.
It is good for them to have the credit card, but make absolutely certain that they pay the balance every month on time! Kids have other things on their mind when at school, and paying the credit card bill on time may not be among their highest priorities. Establishing credit isn't the goal, establishing GOOD credit is the goal!
I agree with Eddie – having them start establish credit just as they are leaving high school and entering college is a good time to look at it. They are going to need a credit score once they enter the ‘real world’ and will be ahead of the game if they have established a positive record.
Check with your credit union if they have a student credit card. The CU I use has a special card for students with a $500 limit. Having the limit in place will help them to learn how to use the card responsibly, and maybe have the experience of not-so responsible behavior. As with any learning experience, if they fall down it should be just far enough to learn from their mistake, but not bad enough to cause serious damage.
Another idea I recommend for clients who did not plan or want to have their child take out a student loan. If there are sufficient funds already in place to pay for their last term in college, then have them go ahead and get a student loan for that last term. Then have them use the reserved funds to pay it off over a few months or a year. This will keep their interest to a minimum and also putting a very positive mark on their credit history.
Hope this helps.
Andy Tilp CFP®
Something that I found helpful when I reached my college years was to buy a new car with an auto loan that my mother cosigned. I was able to get zero percent financing this way, which gave me a very reasonable monthly payment and more importantly helped me enormously to start building my credit substantially.
Unfortunately, in most states, minors cannot sign a legal contract. As such, the parent or another adult must sign for the account, and put it into their names.
When I was 12, a vacant lot came up for sale in our neighborhood. Us neighborhood kids had enjoyed it for years, playing baseball and touch football on it. I'd worked in our family business since I was around 6 years old... summers, weekends, and after school. My parents understood the value of a dollar, and had instilled that, along with a good work ethic since I was young. I had a savings account and a couple of CD's at our local bank, where I'd deposit my earnings every week or so.
As such, I was pretty "well-to-do" for being a 12 year old. I found out the asking price for the lot, and asked my father, who owned some real estate if it would be a good investment. He said, "Well, son, land is one thing they ain't makin' any more of".
I didn't want to put down everything I'd saved on a speculation, so, asked my dad if he'd co-sign on a mortgage so I could buy that lot. We went down to the local bank, and talked to the President of that institution about how we could do this. Of course, my Dad had to sign the note, and the property was put in his name until I was 18 (the property was paid for by then).
But, the important part of this story is, I got to know the local bankers over the years. Every time he'd see me in the bank making my mortgage payment, or a savings deposit, he'd ask how I was doing. The tellers all knew me as well. So, once I was of legal age, in spite of not being "legal" owner of the property, I never had a problem getting a loan after that.
Now this would probably not work out as well with a "Bank of America" branch, but, there are several locally owned banks out there that might help your kids establish a history prior to their entering the world of adulthood. As a finale to this story, I also paid for my own college education, and after college, I married the girl of my dreams. We moved into our first house on that same lot, that we built prior to our wedding... we lived there for ten years, until shortly after our second child was born... that same local bank financed that house and three cars for us during that time period, knowing that I was a "good bet" due to my past history with them. And, that first house was paid for free and clear before we built the next one...
John, WOW! I'm literally in a type of shock seeing that there wasn't ONE of my colleagues that asked why you were concerned about your child's credit score. How about this? I mean this with the utmost respect, if you teach your child to resist the temptation to ever take out credit, their credit score will always be excellent, and yes I am aware that to have a "perfect credit score", one actually has to charge up credit cards, and such. But there it is! The irony! Why doesn't one's credit score applaud someone that NEVER puts money on a credit card? When we all know that is the wise choice, especially with all the bankruptcies. All conspiracy jargon aside, credit issuers and credit scoring companies and bureaus are basically allies.