Whether your child is starting college virtually or going on campus this fall, you may be thinking of giving them a credit card to cover their expenses. But what if they don’t have any credit history yet? What are your options for helping your child build credit? Here, we’ll help you explain credit building to your college student so they can make smart decisions.
Signs That They’re Ready for a Credit Card
Your child may be old enough to strike out on their own and start college, but are they mature enough to handle using a credit card?
Here are some signs that they’re ready:
- They can explain how credit cards work.
- They use a debit card, and understand the difference between debit and credit.
- They have checking and/or savings accounts.
- They know how to budget and manage money.
- They’re comfortable talking about money, and asking questions when they don’t understand something.
- They’re mature and controlled when it comes to spending and saving.
This list isn’t exhaustive, nor does your child need to tick off every item to be ready for credit. You understand your child’s strengths and maturity level, and you’ll know when they’re ready.
Co-signing on a Credit Card
One way to help your child build credit is to co-sign on a credit card with them. Co-signing simply means that, if the account owner (your child) fails to pay the bill, you agree to pay it instead. Co-signing is an option when a person doesn’t have enough credit to open an account on their own. The co-signer’s credit history makes it less risky for credit card companies to take on the account.
However, this can be risky. Should your child get carried away and spend too much, it’s up to you to pay the balance. Any mistakes made on their part, like failing to pay what’s due or running up the credit utilization ratio, can negatively affect your own credit score.
Adding Your Child as an Authorized User
There is a safer alternative to co-signing on a new credit card: adding your child to one of your existing accounts as an authorized user. They’ll get a credit card in their name and the account will be added to their own credit history and record, but you’re still the one in charge. You’re also the one responsible for paying the balance, not your child.
Your child can make purchases as an authorized user on your account, and some card issuers even allow you to set limits on authorized user spending. If an issuer doesn’t allow limits, you can still talk to your kid about safe spending. When all goes well, your child’s credit will get a boost, and they’ll grow accustomed to using a credit card responsibly.
Secured Cards and Student Cards
Other options for building your child’s credit include secured cards and student credit cards. A secured credit card requires a small deposit around a few hundred dollars, usually equal to the credit limit they’ll be given. This deposit makes it less risky for the issuer to give your child the credit account. With a low credit limit, it’s also safer for your child to use and pay off the balance regularly.
A student credit card is similar to a regular credit card, but tailored towards college students. Some issuers offer student credit cards to help college-aged kids build credit. After a history of good use, issuers may offer regular credit cards with fewer limitations. Many student credit cards also offer rewards programs and incentives for use. Most also require that your child be at least 18 years of age, and have a source of income to support their credit line.
Talk About Using Credit Responsibly
No matter which path you choose, it’s important to talk to your kid about using credit. Remind them how credit cards work, the short-term and long-term consequences of misusing credit, how interest works, and so on. Set boundaries for their monthly spending if you’re unable to set limits with the card issuer. Discuss what will happen if they abuse their credit card, go over their limit, or fail to pay their balance.
Help your child build solid money management skills and credit card habits now, and it will pay off when they’re independent adults. It’s easier to make a mistake and learn from it with a student card or as an authorized user. Card issuers, banks, and credit reporting agencies aren’t quite as forgiving with regular credit cards.
If you want to help your college kid start their future off on the right financial foot, we also offer free consultations for our clients’ children. Learn more about Guiding Wealth and how we help families like yours become financially responsible, and also build and protect wealth.