As we’re getting near graduation season, I thought it would be appropriate to talk about some student, grad, and young adult stuff in the world of credit.
Let’s face it, our schools don’t teach kids many of the tools that are amongst the most important for financial survival. And, to be honest, many parents don’t really do a good job, either. Not from lack of wanting to, but sometimes just not having the tools and insights themselves. Plus, if the truth were known, lots of parents really hope their kids don’t end up in the same financial mess they’re in when almost two-thirds of households live payday to payday.
One of the most common questions I get is how to start to establish credit for an 18 or 19-year old. But I’m always torn on this issue. In an ideal world, I’d like no teenager to ever have credit. Why? Because it means they won’t borrow, and not borrowing is THE best recipe to financial success.
However, reality is that most of us do want to finance a home at some point in the future, and sadly, many want to finance a vehicle at some point. A credit rating is also something that many employers look to, and a credit report is pulled by most larger landlords or management firms.
There is a large section in the It’s Your Money book on establishing credit. Make this one of THE best $20 grad presents you can give your son, daughter, or grandchild. It’s something they can refer to for years to come – before it’s too late.
Here is one easy and quick way to establishing credit for any young person: Apply for a credit card under your name, with your son or daughter as the second applicant. The card is approved based on your credit rating, while your son or daughter will have their name shown on it. When the card arrives, lock it away. Do NOT give it to your son or daughter to use. Don’t even give them the card number, or they’ll have no problem using it for on-line charges.
Because their name is on the card, it’ll report to the credit bureau with the limit, the length of time the account has been open, and always a zero balance. They key is to get credit established so a credit file gets going. A credit rating is partly based on how long someone has had a credit file, and this will get them started.
Why not give them the card? Because you’re fully liable for the charges as a joint applicant. This isn’t meant to be an experiment in temptation, but an easy way to establish a track record and credit rating. Activate the card, put it far away, and just use it once a year for a $2 or $5 charge, in order to keep the account active.
Two or three years from now your son or daughter has a solid credit rating and what they do with it at that point is up to them. Hopefully, by that time, they’ve learned some financial, credit, and borrowing tools. If so, you’ve done your best. If not, whatever they borrow at that point isn’t your problem, and won’t impact your credit rating.
Make this a priority for a grad present. After all, “graduation” to understanding the insights of finances is something we’ll all use for a lifetime. Maybe it’s for someone graduating from high school or university. Or maybe it’s the rest of us graduating from financial insanity, graduating from not wanting to be broke anymore, or graduating from the years of living on way more than we earn.