Helping Young Adults Establish Credit

For young adults in high school and college aged students, it isn’t as easy to build credit as it has been in the past. Before 2009, you could walk on any college campus and see credit card brands splashed across canopies and pop up tents that littered the campus. Enticing students with freebies and giveaways to capture them as customers (even if they didn’t yet have a job) was common practice. The CARD Act of 2009 stopped that practice by not allowing credit card companies to offer credit cards to kids under 21 unless they have their own income or a co-signer.

Since building a good credit score is important and can impact many financial situations including rent and car insurance, the question is how should young adults build their credit score? Building a good credit score is a process that really should begin in high school. If a parent has good credit, the simplest solution would be to add your high school or college aged kids to one of your credit accounts as an authorized user. This would allow a parent’s positive credit history to begin to show up on a child’s credit report. Adding a young adult to a credit account can help them build their credit without giving them responsibilities they may not be ready to handle while helping them begin to understand how credit works. Another option is to co-sign on a low limit credit card account. The bill can go straight to a parent who will monitor the account, the payments and the spending. The credit card statements can be reviewed together. At the start you may not even give your child a card to keep or you may allow them to use it for a predetermined purchase, whatever you are comfortable with. Keep in mind, if you give your child the responsibility of a card that you co-signed for and the payments are made late or not at all, your credit will be damaged and you will be responsible for the bill.

Young adults need to understand how to develop a spending plan (notice I didn’t call it a budget) and why it is the central component of a successful money manager. It would be ill advised to give a college student a credit card without creating a spending plan (it is a really bad idea for consumers of any age!). Parents are likely the biggest source of financial information for their kids, so talk to your kids about money and be sure they understand the opportunities credit can provide as well as the pitfalls.

Finally, make sure your college aged children know understand that the goal is to get them on the right foot with credit and money management. Once they have established their credit history, they are expected to step out on their own and handle their own credit accounts. Since most young adults will be short on income, using credit may look appealing to them in the short run. It is extremely important that they understand that carrying over balances on credit cards with high interest rates will strangle their cash flow causing undo financial stress. Make sure that your young adult understands the cost of credit can be extremely high when it is mishandled but when handled correctly, credit can benefit them now and into the future.

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