No age is too early to start building credit. If your child is nearing the end of college, there is no better time than the present. Without a solid credit history, even a good job and significant down payment may not be enough for your child to obtain a loan.
There are many great ways to help your child build credit. Some options cost a little bit of money, but only in the short-term. Some of the options are free, however come with a bit of risk. No matter what your situation is, there are some ways you can help your children.
Show your child how to create a good credit history:
1. Start with a secured credit card
This type of credit card works just like any other except that a deposit is paid up front to open the account. The amount of the credit limit will be no more than the amount of the money deposited.
● While you still have to make monthly payments, the bank offering the card is 100% covered by the deposit. If your child fails to make a payment in full, the money is taken from the deposit.
● After you build some credibility with the bank, most will allow a secured credit card to be converted to a conventional credit card.
● The deposit will be returned if you decide to cancel the card. Just keep in mind that these types of cards sometimes come with fees attached, which makes them expensive to use.
2. Be a co-signer on a loan
Help your child to take out a small loan with your backing. The amount borrowed doesn’t need to be large, just a couple hundred dollars is enough to start building a credit history. The bank will feel more comfortable having your name on the loan as a backstop, assuming you have good credit yourself. Just be certain that the loan is getting paid. It might not be a bad idea to keep the proceeds from the loan in your own bank account to make the payments yourself.
3. Use a secured loan
Show your child how to use a savings account as collateral for a loan. Banks really like this type of loan because they are 100% covered in the event your child makes the payments or not. The funds that are kept in the savings account are released as the loan is being paid down.
● These types of loans are easy to obtain and work very well in building your child’s credit.
4. Allow your child to be an authorized user on your credit card
This is fast and simple to do. A quick phone call and a signature is all your credit card company needs. Your child will receive their own copy of the card with their name on it. Any charges that they make will show up on your bill. This is an added bonus as you’ll be made aware of their spending habits.
● Remember that the credit card is still your account and your responsibility. If your child decides to fly to Cancun, Mexico for spring break, keep in mind you will still be legally responsible to pay the bill.
5. Be a co-signer on a credit card
Just like cosigning a loan, your child will have their own card, but you won’t be receiving their bills. Be sure you know and trust your kids to be responsible or else you’ll be building back your own credit as well.
It’s important to begin building a solid credit history early before you need it. If you’ve ever had poor credit yourself, you know what a challenge this can be. Give your children a solid financial start by putting a plan in place so they can avoid being in such a position.
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