Establishing a Credit Score
You put so much time and energy into getting your kids through college, now what about getting them out of the house? You've checked all the boxes: foreign language skills, a varsity sport, school clubs, and community service. Unfortunately, their new landlord is only interested in their credit score and proof of income. You can work on this essential starting their senior year in high school.
A few disclaimers: If you are not good with credit yourself, you are going to need someone who has experience managing credit to guide your teen. And if you think they aren't ready for a credit card, wait until they are. They can do a lot of damage to their score, and possibly yours.
Getting your teen a credit card in their own name. Once they reach 18, some credit card companies will give a teen a card with a low credit line. If you are comfortable with that, get them a card in their own name, AFTER establishing ground rules. 1. Make sure you have online access to see all of the transactions and payments, and set up notifications. 2. Define acceptable purchases. Gas, school supplies and emergency towing are good basics. Add or subtract categories based on your family's life style.
Picking the right card: A card you use with a "Refer a Friend" option works well. You can send your teen the link and then you each get the bonus. Look for a cash back bonus, and stay away from cards with annual fees. Read the notes on calculating income. Some cards may allow you to count merit scholarships as income. If your teen does not qualify for a regular card, do not co-sign. Instead, go with a secured credit card. Look for a card with a refundable deposit and no monthly fees. Make sure that the card builds credit, and is not just a pre-paid debit card.
Managing a credit card: Once the card arrives, spend time together clicking around the site so your teen knows how to read a statement, how to set up a payment account, how to see pending activity and most importantly, how to freeze a misplaced card. Spend extra time explaining minimum payments,
paying above the minimum or just paying in full. Your credit card statement will show you how minimum payments stretch out the debt. It is eye-opening! Keep the charges low and pay the card in full each month. Follow the "slow and steady" dogma and allow your teen more freedom to use the card for other things, once they have demonstrated responsibility.
After months of on time payments, you will notice increases in your credit limit. While you can request to increase your credit limit, it is better to let the card company offer periodic increases. Do not increase spending when the limit increases. Credit scores look at your credit utilization, how much you owe versus your limit. Charging $100 per month on a card with a $200 limit equals 50%. If you keep that same level of spending on a card with a $500 limit, your utilization drops to 20%, a much better number.
Lowering the credit limit: You and your teen may decide that a higher credit limit is just too tempting, and want to go back to the old limit. Credit card companies make it easy to request increases, but tend to be silent on lowering your limit. With most companies, a simple secure email request through the website will accomplish that change.
Remember to discuss expectations with your teen before they get a credit card, and don't move forward until you are comfortable they are ready for the responsibility. Then monitor their usage and payments. This is all about establishing credit at an early age, and empowering them with credit management tools when they are on their own.