6 Steps To Help Young Adults Build Good Credit

We were recently asked by a client how their young adult child could start building a good credit record.

That’s an excellent question.  Parents should realize that learning how to use credit responsibly is important for their child, and it’s good to start early to build a good credit rating (the longer your child has had credit in their name, the better their FICO score).

For young adults in their young to mid-20s who are in grad school, or starting out with their first professional jobs, building good credit is a must. “It will help you qualify for loans, auto  insurance, rental applications, cell phone plans and can even affect whether you get a job,” write Emily Starbuck Gerson and Jeremy M. Simon for CreditCard.com.

Here are some options to consider:

Open a checking and saving account.  Banks differ on their policies, but some banks will open accounts for kids as young as 16 if a parent co-signs. This is a great way to learn account basics like using a debit card, understanding interest and compounding, reconciling account statements, and online banking. Look for banks offering special account packages that appeal to college-age kids and young adults, like PNC’s Virtual Wallet.

Add your child as an authorized user on your card. Your are still on the hook for the bills, but account activity will appear on both your credit reports and your child can benefit from your good credit rating.  It also helps you monitor their card use and bill payment history.  Think of it as a credit card on training wheels.

Have your child apply for credit on his or her own. Certain types of credit are easier to obtain, and that’s where your child should start.  Rather than applying for a MasterCard or Visa, it may be easier to obtain a secured credit card, a department store or retail store card, or a gas station credit card. A recent Kiplinger Personal Finance article suggested the American Express Blue card or Capital One Secured MasterCard as two possible options.  A car dealer may also be willing to extend credit if your child is shopping for a car. Also, remember to apply for credit sparingly.  Too many applications at once can ding your rating.

Get a job.  Having steady income always makes it easier to show creditworthiness, and helps underline the link between earning power and borrowing capacity.

Co-sign a student or other loan with your child. Make sure they understand the importance of paying on time, since both your credit histories are on the line. Encourage your child not to over-borrow and make sure future earning potential justifies the loans. Paying student loans on time each month can help your child cement a solid credit rating.

Understand the keys to good credit.  “Remember that credit can be a useful tool, but it can also get you in trouble,” reminds Justin Pritcherd of About.com. It’s always a good idea to reinforce the cardinal rules of good credit with your child, so you can both avoid a lot of pain and heartache down the road:

  • pay all your bills on time (timely payment has the biggest impact on your credit score)
  • pay your balance in full each month so you don’t get in over your head
  • practice using credit with regular, small purchases that establish creditworthiness
  • avoid splurges and impulse purchases (if you can’t afford it, don’t buy it)

More Tips

Money Girl: Quick and Dirty Tips

CreditCards.com — 10 ways students can build good credit

 

 

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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