Parents what if you could keep your children safe from debt until they better understood how to use it? Many students go to college and begin applying for credit cards with little to no education about debt and how to use it. There is nothing wrong with debt itself. It’s not having credit that’s bad, it’s abusing credit that is harmful. Most students do not have income for paying back the credit cards, so they either default on the payments or it falls on the parents.
Teaching students how to manage cash is the first step. This starts with having a bank account and a debt card. This first step helps them learn the value of money. This is especially powerful if they have earned the money themselves. In this article, I’ll give you 3 ways to educate your children and help them start off with a great credit score and money in the bank.
Without active and positive trade lines on your credit report you may not have a credit score. No credit score at all is not much different from a bad credit score. You will most likely be denied credit because you have no history. No history means big risk to the banks. When you don’t have a credit history, it can be difficult and frustrating to obtain a credit card or other loans. This is why many people rely on cash. Cash is king, but credit is queen, so you need both to navigate the money cycle.
A child can learn the value of money by knowing that money has a cycle. At Presidential Lifestyle we define the Money Cycle as earn, grow, protect, gift, and enjoy. When a child receives income from gifts, a job, or allowance it can be helpful to have them deposit it into their own bank account. Another option is using FamZoo. FamZoo is a great tool for helping children learn money management skills.
Building a relationship with a bank or credit union is an important first step. Start by opening the account with the lost minimum and lowest fees. A checking and savings account is sufficient. However, you may even consider an investment account if you are using stocks, bonds, and mutual funds in your household and you want to get your children involved. You can do this as soon as you start giving your children money to spend on their own. When you have active bank accounts in good standing, you are creating a history of being able to manage money.
After establishing bank accounts for 6-months to a year, you can apply for a credit card or small installment loan with the bank. Major banks are more apt to offer special programs for consumers who are trying to establish or rebuild credit; and banks report to all three credit bureaus usually every 30 days, which is what you will need to establish credit quickly. This step can come later but it could be helpful if the student is going to apply for their own student loans.
Secured Credit Cards
Secured cards can be great for teens or young adults because it allows them to get the habit of charging and paying a monthly bill with out as much risk. The secured card is kind of like a bank account that you promise to keep depositing into monthly when you have withdrawn from it.
If you don’t have any credit the secure card will help you build a credit score and show future creditors that you are trust worthy. Eventually, after you have had the card for a few months as you build a good credit history, you may want to apply for a standard credit card. Many of the banks have credit cards specifically for students. Be sure to choose one of the major banks to ensure the card will be reported to all three major credit bureaus. Check out this article to help you understand the options for secured credit cards.
This is not as readily available as it once was in the past but some banks allow you to start a savings account and take out a loan for the balance of the account. Here is the caveat, you often have to leave the money in the savings account and allow the bank to draw on this money to pay the loan back monthly. The bank usually withdraws the monthly payment and reports this transaction to the 3 major credit bureaus.
Become an Authorized User
Parents, if you have a credit card with a balance below 30% in good standing with no late payments, you could consider adding the student to the credit card as an authorized user. Here are two strategies you could employ.
Strategy one, you may add the student to your credit card as an authorized user. Choose a credit card with a low balance, preferable 0 balance. You do not have to give them the card. When the card comes in the mail you could immediately shred it. The student will still benefit. The card will report paid/never late on the students credit as long as the parent pays on time. If you are not the kind of person that pays your bills on time DO NOT add your child to your credit card. If you add them to an account with derogatory history, they will start off with bad credit. This will make it harder to get credit approvals.
Strategy two, the parent could either apply for a new card and request a smaller limit on a card (like $500 or $1000) that you already own. If you already have a card you are not using, you can call them and ask them to lower the limit to something the student can manage. Do this as a safety, you can call back and have the limit increased if you need to. You want the student to learn responsibility before you give them higher amounts. Allow them to use the card giving them a monthly spending amount or allowing them to use it when there is an emergency. This is a great way to help them establish both credit and good spending habits.
Share with the student how the card is repaid. Don’t just pay it for them. Either send them the money and have them pay the card, while you monitor of course, or you could create a day to sit down with them and do finances. I call this Money Day. Start this process before the go away for college or off to live on their own.
Another suggestion may be to blend the strategies. Add them to your card and shred the card when it comes in the mail. Request a new card with a low limit and give it to them to start charging and paying back. Remember they don’t have to use the card for it to report positively on their credit file. If you also get the secured card at the bank the student would then have 3 accounts and a high credit score to start of their financial life cycle.
Please note: the authorized user doesn’t have to be a parent or even a relative. The authorized user just has to grant permission. The credit card companies don’t limit this to relatives. Credit card companies just make sure the primary cardholder knows that they are responsible for all purchases.
To maximize the benefit of this option, make sure that the account you are adding the student to belongs to someone trustworthy. Someone who pays there monthly bills on time, has NO negative history reporting at all, keeps a balance under 30% of the limit and that the account is at least 2 years old.
You choose the strategy for you
You can do one of these steps or all of them. You can start as early as you start giving your child money to spend. The early you begin to discuss money with them the better. Talking about money may not be easy for you but think of it this way; as you teach your children you will learn more.
Here are two resources from NerdWallet that can help you employ these strategies. Find an online savings account and apply for a credit card that is right for you. You may also use these resources for your student when they reach this point. NerdWallet can help you learn your current credit score and aggregate all your accounts in one place.
Share this article with other parents who want to educate their children by giving them real life money experiences.