By Jessica Mora, CFP®
Client Advisor Associate
Beginning to build credit is an important step for your children to take as they begin to become more independent, but they may require some help along the way. After all, a credit score is more than just a number. It affects being able to rent an apartment, purchasing a car, insurance premium prices, qualifying for a job, and can even affect personal relationships down the road. The sooner your kids can begin constructing a healthy credit score and good credit habits, the more they will be able to do on their own, and the less they will need to depend on you.
Freshman Year
For a good reason, it is difficult to obtain any credit without any credit history. So, where to start?
If you, as the parent, have a good credit score (in the high 600’s) you can add your child as an authorized user to one of your cards. Note that if you do not have a good credit score, this will start your child off on the wrong foot.
Another option is a secured credit card, which requires a bank deposit in cash equal to the amount of the line of credit. Just like a regular unsecured credit card, your child should get in the habit of paying off the balance in full each month. Down the road when credit has begun to build up, this may be the longest line of credit history, so your child should continue to keep the account open.
Sophomore Year
Paying big ticket items, such as rent or car payments, on a monthly basis can have a positive impact on credit. Although your child will most likely not be able to qualify on their own and you may need to co-sign, ensure that your child is in fact listed as a co-signer so that on time payments will work to their advantage. Not all rental payments are reported to credit bureaus, so check with your landlord to see if they offer any payment options that will report to the credit bureaus.
Junior Year
If students have been successfully working to build credit, they may now qualify for a student credit card. These are unsecured cards available to students specifically as a means to build credit. Be aware that these cards often have low credit limits and high interest rates, so students should pay off the balance in full each month to avoid costly interest payments.
Senior Year
If your child has been responsible with their credit thus far, they may qualify for a larger credit limit or more favorable loan terms (ie: lower interest rates) on their student credit card. They may also now qualify for a line of credit through a traditional provider.
As your student graduates and begins to pay back any student loans, this will help continue to build their credit. (Set payments on auto-pay, so they don’t get missed!)
As a reminder, making on time payments is the most important factor in calculating a credit score. Keeping your credit utilization rate below 30% of available credit is the second leading factor. Thirdly, the age of your credit history is considered. Also, keep in mind a healthy variety of credit types and how many hard inquiries have been made in the past two years.
Encourage students to take advantage of free tools that track and monitor credit scores such as Credit Karma, Nerd Wallet, and AnnualCreditReport.com.
At Mission Wealth, our advisors are happy to work with you and your family, for generations of continued financial success.
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