Your kids graduate from college and face an immediate dilemma: they have no credit history, which makes it harder for them to rent an apartment or get approval for a credit card. Is there a way parents can help them without risking their own credit score?
An article on Nerdwallet.com suggests a solution that will cost just $200. Your child opens a secured credit card, whose credit limit is equal to a deposit that can be as low as $200. You can make the deposit on his/her behalf, and presto! The cardholder is now able to make small purchases, pay back into the account, and establish a credit score in about six months. The transactions weigh more heavily in credit scoring when the adult child is a primary user, rather than an authorized user on the parent’s credit card. An added advantage: the child receives his/her own separate bill, and becomes accustomed to paying on time. This is the perfect way to get your child comfortable with paying bills.
Credit experts advise that the child holds spending to 30% or less of the credit limit—which basically means putting no more than $60 on the credit card, and then paying that amount back. Parents can spring for a higher deposit if they think the adult child will be responsible for making higher payments.
Make sure your child understands the rules of credit cards, such as the interest rates, minimum payments and due date on the statements. Also, teach your adult children how to calculate how long it would take to pay off the balance making only minimum payments. Eventually, once the adult child has learned good credit card habits by using a card with training wheels, he or she can transition to an unsecured credit card. At that point, the secured card can be closed and your deposit returned.
The aforementioned example illustrates one of many ways a parent can aid a child as they develop financial responsibility. It is an inexpensive strategy to help teach a priceless life lesson. If you are in need of strategies to implement with your child transitioning into adulthood, feel free to contact one of our CERTIFIED FINANCIAL PLANNER™ professionals to discuss possible approaches for you.