Helping Your Young Adult Build Credit Safely and Quickly
Jana Graham XPYRIA Team Insights
Consider this for your child’s 18th birthday gift: his/her first credit card. Whether the idea strikes you as extravagant or downright irresponsible, please read on! In helping your young adult to establish a strong credit history early and learning to use it wisely, you will prepare them for many of the “firsts” that come along with adulthood such as: renting their first apartment, applying for their first car loan or mortgage, or even their first job. Moreover, as mentioned in a previous blog post, credit cards are the safest form of payment in the U.S. – not the debit card.
The good news is that the credit card need not have a high monthly spending limit. Quite the opposite in fact. Charging small items to a credit card (e.g., that monthly $10 gym membership or monthly $20 streaming media subscription) and then paying it off in full every month builds credit quickly. Thus, your child can request a card with, say, a $250 limit and charge $50-$100/month paying it off in full each month.
Kids typically must be at least 18 to open an unsecured credit card in their own name and, if they are under 21, they will also have to prove that they can independently make the minimum payments on the account. If they cannot, they may need a parent or other adult as a co-signer, guarantor or joint applicant who is at least 21 and can demonstrate the ability to make the payments.
Other options for young adults looking to establish their credit history may include student cards and or secured credit cards. Student credit cards function much like regular unsecured credit cards except that the spending limits are typically lower (~$1,000/month) and eligibility may be based on the ability to prove your child is enrolled as a college student.
A secured credit card is another option which can be useful in building credit. With this type of card, the applicant puts down a deposit (usually equal to the credit limit) which is held by the credit card company. Provided they maintain a good payment history, they will get the deposit back when they upgrade to an unsecured credit card (regular credit card) with the same issuer. Since closing the account can have a negative effect on their credit score, it is best to look for a no-annual-fee secured credit card with a path to upgrade to a regular unsecured card with the same issuer. In addition, be aware that some issuers do not report the status of secured cards to the credit bureaus. Thus, before selecting a particular secured credit card, be sure that the issuer reports the status of the card to at least one of the major credit bureaus so that they are, in fact, building their credit!
And finally, you can add a child as an authorized user to your credit card in order to help them build their credit history. Most children over the age of 18 can be added as authorized users without difficulty. Even younger children may be added as authorized users, but eligibility varies by issuer. However, adding your child as an authorized user to your credit card will only help to build their credit if the issuer reports authorized users to at least one of the credit bureaus – so be sure to confirm this with the issuer first. Otherwise, adding your child as an authorized user will be of no benefit to your child’s credit history.