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Helping Your Child Establish Credit

As the world becomes more reliant on credit and debt, it is becoming increasingly important to help your child get their foot in the door of the credit world. Even as unemployment remains high and jobs remain scarce, every individual is expected to have credit.

Technology is not the only thing that has changed overtime. Years back, when your child turned 18 and was ready to have a credit card, all you had to do was add them to your account. These days that will only get them into authorized user status.  One of the first things that your child will need to do is open a credit card.  Even with credit guidelines tightening, you will still see an abundance of those annoying credit card offers in your mailbox or email around the time your child turns 18.  Sort through the offers with them and show them what they need to look for in a good credit card. What is the APR? Is there an Annual Fee? Does it offer any kinds of rewards? Is the APR only an introductory rate? Those are all questions that you will need to help them determine. Your guidance will also help them know what to look for in the future.

What if they don’t qualify for any of the offers they receive? The next step would be to look into getting a line of credit attached to their bank account. The guidelines for these are usually more relaxed since it is usually not a physical credit card and will only be used in the case of an overdraft on their account. Before applying for this type of credit, it is important to make sure that your child is responsible enough to use their bank account wisely. Make sure they know this is not a reason to by those new clothes they wanted even though they do not have the cash available. Drill into them that this type of credit is only to be used in an emergency purpose only. The only problem with the line of credit is that unless you overdraft your account, you will not build any payment history with it.

In this case, you would want to try to get a secured credit card or loan in conjunction with it.  This type of credit will require an upfront deposit which will then act as your credit limit. Many banks offer the opportunity for you to have your deposit earn interest while you are building your credit.  While this is a good option for anyone who is new to credit, be prepared to see higher interest rates and annual fees attached to it.  Typically, after six months to a year of good behavior, your limit will increase without a further deposit and the bank may even refund your deposit.

It is vital to stress to your child the importance of making their payments on time and building a solid credit history. Talk to them about the advantages of having excellent credit as well as the consequences of a poor credit history. Equipping them with an understanding of how credit is the most important determining fact in their financial future will set them on the right path to financial independence.

 

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