July 28th, 2023 7:00am PDT
(PenniesToSave.com) – Establishing credit can present difficulties for young individuals, but some parents have found a potential solution. One common practice involves adding their teenager as an authorized user on their own credit card, providing the child with an opportunity to learn about responsible credit habits from an early age.
While it may seem beneficial for children to piggyback on their parents’ credit history as authorized users, this approach does have its drawbacks. Erik Beguin, CEO of Austin Capital Bank and former member of the Consumer Financial Protection Bureau Community Bank Advisory Council, explains that by relying solely on their parent’s credit, children miss out on developing their own credit profile. As authorized users are not responsible for paying the credit card bill, these payments do not appear on their credit report. This can make it more challenging for them to establish a positive payment history and build their own credit.
Instead of just adding your child as an authorized user on your credit card, Beguin recommends considering making them a co-signer. This approach allows them to share both the risk and the rewards of being responsible for managing the credit card bill. Co-signing can be beneficial for your children as it helps them establish a healthy credit history from an early stage, reducing their reliance on you in the future. Financial advisor Derek Miser supports this strategy.
However, there is a potential downside to consider: if your child is unable to repay the debt, you may be held responsible for it. Despite this, Ted Rossman, a senior industry analyst at CreditCards.com, suggests that young adults should establish their own credit within six months to a year after using their parent’s card as a way to build credit. This advice holds particularly true if they are still living at home but gradually becoming more independent.
Young adults who want to build their credit history can explore the option of obtaining a secured credit card. These cards typically require a cash deposit that becomes the individual’s credit line, making them accessible for those without an established payment track record. By taking initiative and starting early with credit building, young adults can establish a strong foundation for future financial independence.
Understanding why having good credit is so crucial
The importance of having a strong credit score cannot be emphasized enough. Knowing why good credit is vital will guide you towards financial success.
Having a strong credit history provides individuals with various benefits and opportunities. It enables them to qualify for loans and credit cards that come with favorable terms, ultimately saving them money on interest rates and fees. With good credit, people can achieve their goals of homeownership, purchasing a vehicle, or pursuing higher education by securing mortgages, auto loans, and personal loans.
A good credit score can have an impact beyond just being able to access credit. Landlords frequently review credit histories when evaluating rental applications, and having a positive credit score can improve the likelihood of securing the desired rental property. In some cases, employers also take into account credit scores during the hiring process, seeing it as a measure of an individual’s responsibility and financial stability.
Having good credit is a reflection of responsible financial behavior. This includes consistently paying bills on time, managing debt wisely, and using credit cards responsibly. These actions contribute to a positive credit score, which demonstrates reliability and earns trust from financial institutions. Ultimately, responsible credit management sets the foundation for a more secure financial future.
Conversely, having a low credit score can have negative implications. It can result in higher interest rates on loans or even loan denials, making it difficult to accomplish financial objectives. Moreover, it can lead to increased insurance premiums and restricted access to certain services and products.
The FICO score is a common credit scoring model that ranges from 300 to 850. If your score is above 670, it is considered “good.” A score over 740 is classified as “very good,” and anything above 800 is deemed “exceptional.”
According to Matt Schulz, LendingTree’s chief credit analyst, once your credit score surpasses 800, you have a high probability of loan approval and qualify for the most competitive interest rates.
Recognizing the significance of having good credit puts individuals in charge of their financial stability. By making wise financial choices and upholding a positive credit record, they can open doors to various opportunities and forge a secure and prosperous future.
Talk About Responsible Debt with Your Kids
Before families select the right credit card, it is important to have a discussion about credit management and responsible debt usage, as highlighted by Beguin. The critical factors include making timely bill payments and keeping a low balance on the credit card.
It is ideal for financial education to start at home, and schools can also play a crucial role in this. It is recommended to begin these conversations about finances well before the teenage years. Discussing money matters should not be considered taboo or avoided, as is often the case.
Final Thoughts
To build good credit, it’s essential to practice responsible financial habits such as timely bill payments and maintaining low credit card balances. Having open and honest discussions about credit management within families is crucial. By providing financial education from an early age, parents can empower their children with the necessary knowledge and skills to navigate the complexities of credit and debt when they reach adulthood.