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Teach Your Kids to Use Credit Wisely

By Allan Kunigis

  • PUBLISHED September 18
  • |
  • 6 MINUTE READ

Many young adults face a frustrating challenge when starting their financial lives: They can’t get credit without a credit history, but how do they develop a credit history without access to credit?
 The solution is to carefully and consistently work on their credit, by taking on the right level of credit and paying bills in full and on time. That can be especially difficult for young people, who are excited by new experiences. 
 But parents can play a significant role in helping their children develop the skills and habits necessary to build credit, through education and other means. “Young adults can initially benefit from their parents’ good credit standing by sharing an authorized-user credit card,” says Melinda Opperman, a certified credit counselor and executive vice president of credit.org.

“Piggy-back” to good credit 
This process of allowing children to leverage the family’s credit history, known as “piggy backing,” works if the family’s credit is in good standing. But it’s important to note that there is risk on both sides. “Parents should only do this if they’re confident that their son or daughter is financially responsible,” Opperman says. Otherwise, it can hurt everyone’s credit.
A gas card can be a good first credit card for teenage or adult children to own. It’s fairly low risk because it’s typically used for small amounts. It can also have a low credit maximum, preventing new cardholders from quickly racking up debt.

Use training wheels
Another option is a secured credit card. These are usually fairly easy to obtain through your bank or credit union. The parent or the child would deposit a few hundred dollars into an account to secure the card. After six months or a year of responsible use, the cardholder can usually get the deposit back, and the card will become unsecured. “It’s like a credit card on training wheels,” Opperman says.

Save at the same time
In order to help their children to keep their debt levels low, parents should explain the benefits of saving money for payments. At the same time young adults open their first credit cards, make sure they also open devoted savings accounts where they can save to pay off the cards. Suggest keeping the balance of their savings account higher than the credit limit on their credit card, in order to avoid any payment issues.

Explain the power of good habits
When a young person gets approved for their first credit card, it’s important that they see it as an ongoing responsibility and understand that they shouldn’t “just throw it in the drawer and forget about it,” Opperman says. Instead, they should “use it regularly and responsibly. Never ever miss a payment or pay less than minimum.”
To ensure that your child always pays at least the minimum, teach them to set up either automated minimum payments, or to receive payment reminders. And by using the card and paying it off in full month after month, they will steadily improve their credit score, which is tracked by a number of companies, most notably Fair, Isaac and Co. (FICO).
How is your credit score determined? According to FICO, the factors that influence your score include:

●    Payment history (35% of your score): Pay bills on time every time. And keep the first credit card you open.
●    Amount owed (30%): Using just a small percentage of your credit limit makes you less of a risk.
●    Length of credit history (15%): The longer the better. Young adults will build this gradually.
●    Types of credit (10%): It’s helpful to have different types of credit, such as personal loans, credit cards, and mortgages.
●    New (or recent) credit (10%): Having a lot of credit inquiries over a brief period could temporarily lower your score.

Opperman advises new credit card users to be cautious about increases to their credit limits, and advises young adults not to get more than two credit cards.

A valuable tool

Credit cards are valuable financial tools. They offer many benefits, including programs that give points or cash back, and deals on car rentals and hotel rooms, among other perks. They offer security and built-in safety nets on many purchases, helping with refunds or warranties. 
 So, what are the best card features or types of cards for young adults? Look for low annual fees, Opperman says. And because your bank or credit union already know you, they might waive the fee if you’re a good customer, she says. 
 “First, build great credit,” she says. “And establish a good credit history. Good credit is your whole financial DNA.”

Allan Kunigis is a financial freelance writer based in Shelburne, Vt. He has written about personal finance for more than two decades.

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