Many of you encountered several problems to manage your credit in the past. So, you won’t let this happen to your children today. You must help your kids to avoid the same problems. But preparing your kids to become credit-worthy is harder than it might seem. Most parents became uncertain of how to build good credit for their sons and daughters.
Don’t worry parents, have a look at these tips below for putting your kids on the right track of building good credit:
1. Educate your kids about responsibility towards good credit - You don’t expect that the school is going to teach your kids about personal finance management along with conventional education. This is why it’s important to guide your children to build and maintain a good credit by giving the fundamental lessons on using credit responsibly.
Specifically, you’ll need to give importance to the aspect of “on-time bill payment” and “avoiding credit debts”. To maintain a good credit score, these are the two main factors which you need to inform your kids. It’s never too soon to start learning about these lessons, so as soon as your children put their first step into the school, it’s better to tell them the basics of money and credit management.
2. Co-sign a credit card with your kids - As an outcome of the CARD Act of 2009, people under the age of 21 are having much trouble while getting a credit card on their own. To solve this issue, you may decide to co-sign a credit card for your kid. This is a very sensitive issue, as many parents think being a co-signer for their kids to get a credit card account is nothing but an accident waiting to happen. Yes, there’s a chance of a big danger, as your kid will receive the credit card bills only, being the only primary account-holder. If he or she didn’t pay bills on time or didn’t pay at all, as a co-signer, you may have to face the consequences. If the matter gets truly serious and the debt becomes seriously delinquent, both you and your kid will get a major blow in your credit scores.
Your child can raise his or her credit limits without informing you, the cosigner. So when it comes to paying the tab, only you’ve to pay off the card to protect your credit score, that would be much higher than you’ve expected. After considering those issues, being a co-signer is a safe option only when your kids are more than trustworthy to you.
You can also reduce your risk by providing your support to your kid while he is still living with you. His bills would come to your address and you can easily monitor his transaction. Make sure your kid will pay off his bills on time, and if possible pay more. It’ll help him a lot to get extra benefit for growing their credit score. By this way, you can make yourself safe and also teach money skills to your kid.
3. Allow your kids to become an authorized user - Another good way is to add your kids in your existing account. That means your kids will be treated as another authorized user of your credit card account. It’s very easy to add them. You just need to call your credit card company and ask them to add your kids. They'll issue separate credit cards to your kids, yes, for each one of them. Your kids gonna use those cards just like your original cards to pay their bills or purchase anything. The biggest difference between co-signing and authorized card is the total bill will be in your name only.
There are few downsides of this system also. You are legally bound to pay the whole charges on behalf of your children. As you have to sign a legal agreement, you’re liable to pay every single penny you owe to the credit card company. If your kids refuse to pay the credit card company or you, you’ll have nothing to do with it.
But on the other hand, without your consent, your kids can’t raise the credit card limit. So, they’ll have to spend the money according to your decision. You can easily monitor your account and your kid’s activity. If the child becomes rogue, you’ve the authority to rescind his or her authorized user status. Even, you can ask your credit card company to remove your kid's name from your account anytime.
The “authorized user” approach has some benefits. The authorized user normally receives credit benefits for the total payment history on a credit card. So, if you had this card for a long time and paid off all your bills before time, your kids will also get the benefit being part of your account and the credit history.
4. Get them a low-limit bank card - Several banks will agree to give a low-limit credit card to your kids while opening a checking account. These cards don't have the "secured" character by default, rather they usually come with high rates. But practically, this card will be the perfect option for your kids who’re willing to pay off their total credit card balances each month.
It is a good option for your kids as almost all banks will provide a debit card with each checking account for students. But you need to remember that, debit cards don’t help your kids to build a proper credit history. A debit card will only work when your kid has enough money in his/her account. As soon as the balance gets finished, the card will be useless and you need to deposit more money to use it again. So, if you consider guiding your child to establish a perfect credit score, you’ve to apply for a credit card loan.
5. Apply for secured cards for your kids - If you feel that your kids aren’t that much responsible towards money management, then the best option for them will be availing a secured card. These cards have low credit limits along with a corresponding deposit, which secures the account holder from being a defaulter. For an example, if your kids deposit $1000 into that credit card account, they’ll get a credit card with the spending limit of $1000 or less.
However, there are some annual fees in most secured credit cards. Theses cards have late penalties and also overdraft charges. The rate of interest you'll pay on the revolving balance is quite higher than what you might earn on your deposit. In the end, we can say that secured credit cards aren’t for everyone because of their high penalty charges and expensive nature.
So, at least we can say there are few, tough and easy ways you can actually guide your kids. Make them understand the value of money, so that in future they’ll save more than you’re right now.