Baby Steps in Helping Someone Establish Good Credit
If you are a parent of an older teen or adult child and the idea of them walking around with a credit card scares you, there is good reason. Anyone using credit and debt without a proper appreciation for the pitfalls can find themselves on a disastrous date with debt later on.
The best time to help your children establish and learn about credit, though, is while they are still living under your roof. That gives you a better opportunity to mold their habits in dealing with personal finances. Helping your child establish credit does contain some risk for you and your child, but eventually he or she will want to buy a car and perhaps a house and won’t be able to rely on you for help. That, we’re sure you will agree, will be a good day.
To help you get there here are three ways you might consider helping your child establish a credit history. Two of the three pose a potential risk to your credit. Let’s start with the one that doesn’t.
- Open a secured account. There are a number of financial institutions that allow a customer, even one with no credit or bad credit, to get a card that looks and acts just like any other credit card. In a secured account, however, the credit limit is based on how much money is deposited into the account from the start. Think of it as a credit card with training wheels. Perhaps you can deposit the initial amount needed, which is typically a few hundred dollars. That way the card actually feels like a credit card to your child. Train your child to only spend as much as he or she can pay off in full every month. Teach them to plan spending, to see the pitfalls of credit spending. After a while they will qualify for real credit cards of their own.
- Co-sign on a loan or a credit account. Take out a small loan from a bank, offering something as collateral and include your son or daughter as one of the borrowers. They then benefit from your good credit standing. In order for them to learn about the importance of repayment, they must be responsible for making those on time payments, so they experience the impact of living with debt.
- Sign your child onto one of your accounts as an authorized user. This practice nearly went away. Fair Isaac Corp. the company that created the most-used credit score formula, nearly eliminated the practice. For years, parents were the vast majority of those employing the practice, but a few years ago companies began selling a service in which people with bad credit could be added as account holders onto accounts held by people with good credit. Fair Isaac had announced it was going to eliminate the practice, including for parents, but in recent weeks changed plans. Company officials said they had figured out how to dramatically cut down on fraud, so parents can continue pursuing this practice.
There are significant down sides to options 2 and 3. Namely, if your child runs up expensive bills that they cannot pay, you are responsible. In addition, these balances go against the amount of money you can borrow should you want to purchase a car, home or anything else based on credit. Finally, if your child is responsible for making the payments and they are late, this will reflect negatively on your credit.
Again, the best idea is to be hands-on in working with your children to make sure they have good training in how to work with credit, training that can help them (and you) avoid trouble later on.