Some of the greatest lessons we can teach our kids are financial ones. You may be surprised how little our older teenagers and young adults know about managing their credit cards, or what credit scores mean. This MarketWatch article from Joanna Nesbit – reprinted by permission from NextAvenue.org – offers credit and debt tips for parents of college students and recent graduates.
If you’re the parent of a college student or recent grad, you’ll want to explain why establishing good credit is key for a postgrad future of utility bills, auto insurance and apartment rentals (as well as becoming financially independent) – and that wise use of a credit card can be a help.
“Credit cards provide peace of mind for emergency purchases and offer superior fraud protection to debit cards,” says Gerri Detweiler, director of consumer education for Credit.com, a free educational website. They can also jump-start essential conversations about money and debt management.
So pass along the following on three ways to start out with credit cards and tips for handling them without getting burned:
Becoming an authorized user
This can be an easy, low-risk way to build credit. You, the parent, add your child as an authorized user to your existing card account if your card allows (most do) and designate a separate, low credit limit for your son or daughter.
Your student benefits from your good credit score because the account’s usage information appears on both the primary and authorized user’s credit report. “This arrangement also promotes conversation about spending habits, because parents can easily monitor the card,” Detweiler says.
Students might qualify for their own card after six months of positive credit history, she adds, but if they’re under 21 they must be employed.
Getting a secured credit card
Typically, a secured card is available to anyone 18 or older and simply requires a small deposit of $500 or $1,000, which serves as the card’s spending limit. The deposit doesn’t pay the monthly bill – the user must make payments – but it secures the user’s credit and limits how much he or she can charge. When the account is closed, the deposit is returned.
“It’s like a credit card on training wheels,” says Laura Adams, a personal finance expert and host of the Money Girl Podcast. “It might be more beneficial than ‘authorized user status’ because it’s in the child’s name.”
Getting a regular card in his or her name
This offers a powerful way to build credit. If your child has conscientious spending habits and experience handling a debit card or managing an allowance, an individual credit card with a low limit of, say, $500, can be a good idea.
