A parent asks how he can help his children establish credit. Our expert lays out his options
Dear Opening Credits,
I want to know how my children could open up credit card accounts and establish credit. They do not have employment but do have a steady — small, but steady — income from their property rental. What is a good way for them to start? It would be under their parent’s supervision, of course. How could they establish credit? Thank you. — Pete
Good for you! I wish more parents would actively teach their kids how to borrow and repay money. Unless you actually look forward to bailing your woefully unprepared adult offspring out of financial hot water, credit education is paramount. The sooner they know how to wield that piece of plastic safely and advantageously, the better off you’ll all be.
As far as them actually getting credit cards, though, that can be a little tricky. Recent credit reform — the Credit CARD Act of 2009 — made it considerably more difficult for young adults to obtain a credit card in their names only. It makes sense because these debt instruments can lead to, well, debt — and quickly. That debt can impair a person’s life before they have a chance to get a real job and save money.
Per that law, credit card companies require evidence of earnings before they can grant an individually held card to someone younger than 21. The income must be enough to support that line of credit‘s payments. The amount your kids are earning may be adequate for a low-limit credit card. However, if it’s insufficient, another option is to open a jointly held account. With it, they’ll enjoy full charging rights, and you can arrange for the bills to be sent to them.
Mind that I have reservations about these arrangements. I’ve seen too many people hurt in the process. The account’s activity will be evident on both parties’ credit reports, and if there are late payments, the do-gooder who co-signed gets dinged. Co-signers are also responsible for any debt the other cardholder incurs if they fail to pay as agreed. All this can lead to terrible discord, so if you do go this route, be sure to have a serious conversation about expectations, and draw up a contract first. Check on the account’s status from time to time as well. Catching big balances or delinquencies early makes sense for everyone.
In the meantime, before going to such lengths, teach proper credit use by example. As a dad, you’re a vital role model, so show them exactly how you manage your affairs:
1. When you charge an item, stop and say that you know what your balance is today and that you can afford to pay the total of all your purchases by the statement’s due date.
2. Whether you conduct your banking online or via the post office, demonstrate how you keep track of your accounts.
3. Explain the concept of minimum payments, interest rates and the fees that are typically associated with credit cards.
4. Have a rewards program? Show them how many points you’ve accumulated and the way they can be redeemed.
5. Talk about credit reports and FICO scores. If you’re comfortable being totally transparent, show them yours.
6. If you’ve made mistakes in the past, don’t hide them. Admit what happened and how much it cost you. Even if you have debt today, be open about what you did and how you’re addressing the problem.
The most crucial point to convey is how easily credit can be mishandled. Emphasize the fact that plastic is never meant to be anything more than a convenient payment tool. When they become cardholders, will they mess up by charging a little too much or forgetting a payment? Possibly. But never forget that mistakes are an essential part of the learning process, too.
See related: Compare credit cards for people with no or limited credit history, Students and the new credit card law: the fine print, Credit card help: the basic fundamentals of credit cards, An insider’s guide to the Credit CARD Act of 2009