Hey Taylor – My daughter is in her second year of college and we’re all starting to think about life on the other side—not just professionally, but in terms of being ready for the financial elements of adulthood. To start, how do we help her build credit when she’s not working or spending much? – Bonnie
Hey Bonnie – Glad you’re asking this question because it’s a really important step for young adults to take as early as possible. Better credit will help with future rentals, earning credit card rewards, and all the big purchases that inevitably arrive as life moves along. Here are a few things you can do to help her out:
–1. Consider making student loan payments. People aren’t required to make any payments on student loans until after graduation, and most people don’t have the means to start paying those bills until there’s more steady income. That said, if your daughter can start making interest-only payments while still in school, she’ll probably ease the future financial burden and start building her credit. There’s no penalty for inconsistent payments before graduation, so it’s worth doing whenever possible to get a jump on the credit building and repayment process.
–2. Get the right credit card. The wrong credit card can ruin a person’s financial prospects, whereas the right card can make a huge difference to a young person’s credit score. What’s the “right card,” you ask? It’s a secured card that might require a cash deposit for approval. It’s hard to get a secured card with a safe interest rate if you don’t have any existing credit; with a little bit of collateral provided by her parents, your daughter can have a credit card with a fixed limit and a respectable APR. People are scared of letting their college-age children get credit cards, but if you don’t do it now it’s only going to get harder and harder as your daughter gets older and has bigger bills to pay. Start now with a credit card that she treats like a debit card (only spending money she has) and that FICO score will be in decent shape by the time she graduates.
–3. Add an authorized user. If you trust your daughter not to abuse the power of credit, you can add her to your existing credit line. You’ll want to have some firm rules in place, but this option allows her to piggyback on the work you’ve already done. Couple that with her own secured card and she’ll be well ahead of other people her age when she sets out to join the workforce.
Credit cards are scary but necessary in a world that relies on credit scores, so you should talk with your daughter and figure out which approach works best for you. This a great time to be making these decisions, so you should already feel good about your efforts. Thanks for the question!
TAYLOR J KOVAR
CHIEF EXECUTIVE OFFICER
CERTIFIED FINANCIAL PLANNER™
