Even though Jake is (thankfully) still a good five years away from heading off to college, I know that time will be here before I know it. I’ve always struggled with my credit, and I don’t want to see my son fall down the same pits that I did. Unfortunately, I have no idea how to help him prepare financially for his future because I made so many mistakes when I was preparing for mine. Fortunately, today’s guest does know what to do and is here to offer a few tips to get your teens on the right path to good credit! Let’s see what he has to say!
Our Kids and Credit: Helping our Teenage Kids build Credit while in College
Credit is earned. It takes a while for anyone to establish a credit history that will enable one to apply and more importantly qualify for the more important loans and other financial services. Most people focus on their credit score just before applying for a car loan or mortgage or business loan. Till then, credit score rarely becomes a significant asset. Since a solid credit history takes years in the making, it is wise to start early.
Unfortunately, young adults and teenagers are not in an ideal position to build a good credit history. Most students have loans. They do not have the established means to develop their credit history, which are usually available to professionals and business owners. Kids are also vulnerable to financial mismanagement and they often have bad debts, which can impair their credit history even when they are unaware of such untoward impacts. Fortunately, there are some simple and pragmatic ways to help our teenage kids to build credit while in college.
Apply for a Credit Card
Teenage kids should apply for a credit card if they have a job. Else, they can become an authorized user of a credit card of their parents. Kids can have add-on credit cards or even be a co-user of bank accounts that have their parents as the primary users or account holders. One of the fundamental requirements of credit history is a traceable or recorded financial account. A bank account is useful but a credit card is more consequential. Many teenage kids have part time jobs. They can use this income as the foundation to apply for a credit card. There are many types of credit cards designed specifically for students in college. One must find the most suitable proposition given the needs and qualifying factors.
Use the Credit Card to Pay Bills
Many teenage kids have their own bills to pay. They often pay such bills in cash. While there is nothing wrong in paying the bills in cash, it is better to use a credit card or a debit card to do so. Cash transactions are not as effectively tracked as digital transactions. All essential bills that are in the name of a teenager or young adult will have the corresponding payments reported to the credit bureaus. A debit card or credit card will enable kids to pay everything from utilities to shopping bills. The detailed history of transactions will establish a teenager as a reliable borrower or one who pays on time. This is a quintessential element of every good credit score.
Do not Exhaust Credit Card Limits
Students don’t always qualify for credit cards. Many of those who do end up overspending and many are so excited with the available credit limit that they go on a spending spree month after month. This is absolutely fatal to building a good credit score. The credit history will take a severe beating if a student takes on a debt that is unmanageable and ends up as a defaulter. The best strategy is to use a credit card sparingly. Students should make necessary payments using their cards and they should pay off the entire balance by the next billing cycle. It is best not to have any unpaid balance on credit cards.
The fundamental reason why many people opt for credit cards is the luxury to pay the minimum balance every month. Having unpaid balance on the credit card reflects poorly on a person, regardless of age and income. It proves that a person is living beyond his or her means. Making necessary purchases and paying those off in a month will gradually build a solid credit history and even the credit card company will increase the available limit quite steadfastly.
Student Loans are for Educational Expenses
Many kids take students loans but most have their parents as co-signers. Regardless of the security or who acts as the co-signer, teenage kids in college should always use student loans for educational purposes only. Buying a car or even a motorcycle, spending money on any item other than tuition fees, accommodation and the expenses related to the course or the degree one is pursuing would tantamount to unacceptable utilization of a student loan. Credit bureaus can track such expenses and those will reflect on the credit history. Also, using student loans for such purposes invariably compel a student to have debts that are best avoided. Having money to spare is much better than having debts and no means to repay.
Do not Co-sign and Don’t Pay for Others
Students in college often co-sign for their friends and often pay for stuff that their friends need. It is fine to help a friend out in a critical situation but it is not wise to make financially unwise decisions. While the friend will suffer the consequences of not repaying a loan, the co-signer will also have a negative impact on their credit history.
About the Author: Steven Millstein is a professional personal finance writer and contributor to many leading financial publications. His work has been mentioned in and linked to from The Bustle, The Huffington Post, Benzinga, Yahoo Finance and many other publications. He also has his own personal finance blog, Credit Zeal, where you can follow him.