Your credit score can open doors – if it’s strong. If it’s not, it can slam those doors shut. But no one is born with great credit. Like most things worthwhile, it’s built and maintained over time.
If your child is heading off to college, send them into the world with the knowledge they need to stay ahead of the credit game. Here’s how.
Credit cards are not about buying items you can’t afford. Credit cards are a useful tool for everyday transactions, provided you have the money and discipline to pay the balance in-full at the end of every month.
It’s Never Too Early to Start
In some cases, no credit is actually worse than bad credit. Many parents will take on all the financial choices for their child. While this usually comes from a good place, it can leave young people ill-equipped for the financial necessities of adulthood.
Remember that the amount of debt you carry can have a negative impact on your overall score. Bad habits can easily arise when relying on the convenience of credit cards.
Teach your child to avoid temptations like late-night diner runs or impulsive online splurges. These are okay every once in a while but can lead to reckless behavior in the future. If they think of their card as existing primarily to build credit, it can do just that.
Develop a Routine
Encourage using a credit card when making regular purchases that can be easily paid off – like fueling up at the gas station or shopping for groceries. That way, they’ll develop a routine and stick to it with small, consistent transactions. For young people learning how to budget expenses, it’s wise to pay monthly phone, Internet or utility bills with a credit card.
On Time, Every Time
Encourage your kids to limit purchases so they’re not overwhelmed with too many bills and inevitably miss a payment. Late payments put a dent in your credit score that can take a while to recover from, and late fees can be costly. By sticking to modest regular purchases, it’s easier to avoid carrying a balance.
Having a credit card can really come in handy during an emergency. But for young people still building credit, big expenditures should only be made during these unforeseen circumstances. Think flat tire—not flat screen.
The Right Card
Do your homework—and encourage your kids to do theirs—before settling on a card. Check the APR (annual percentage rate), any annual fees, credit limits and other benefits or drawbacks. If you plan on carrying a balance, even occasionally, search for the lowest interest rate cards you can find with no annual fee.
If you plan on frequently and responsibly using a credit card, you may want to pursue a card with more generous rewards – that include everything from cash back to airline miles to investment contributions. You are essentially being paid to use the credit card.
“Rewards programs are essentially a revenue-sharing arrangement between the card issuer and the cardholder. The more you use the card, the more rewards you accumulate, so there is a real incentive to use the card for as many purchases as possible, large or small,” says Greg McBride, chief financial analyst with Bankrate.com.
Just remember, don’t spend in excess on a rewards card than you would on a non-rewards credit card.
Know Your Role
Parents like to keep a watchful eye on their college-aged kids who are learning the basics of financial responsibility. It’s reasonable to add your child to an existing account as an authorized user.8 This enables parents the freedom to monitor spending habits while providing some important oversight to the process. Conversely, should you suffer from financial distress, it’s easy to remove your child from the account and safeguard their credit.
“Adding your child as an authorized user is a quick way to get them familiar with a credit card and establish a credit history. Bear in mind that the authorized user isn’t liable for the payments, but you are,” adds McBride.
It’s smart to begin thinking about the future. With good credit, you may be able to obtain auto-financing, loans for a home or rent an apartment more easily. Credit checks can even come up during your job search, as employers may weigh a candidate’s credit history when hiring.
Before sending your son or daughter off to college, share this blog with them to start the conversation about building strong credit – when, how and why.