It’s a classic chicken or egg dilemma: your kids graduate from college and face an immediate problem: they have no credit history, which makes it harder for them to rent an apartment or get a credit card. But how do they get a credit history without someone granting them credit? Is there a way the parents can help them without risking their own credit score?
An article on the website Nerdwallet suggests a solution that will cost just $200. You encourage your child to open a secured credit card, whose credit limit is equal to a deposit that can be as low as $200. You make the deposit on his/her behalf, and presto! The cardholder is now able to make small purchases, pay back into the account, and establish a credit score in about six months. And the transactions weigh more heavily in credit scoring when the adult child is a primary user, rather than an authorized user on the parent’s credit card. An added advantage: the child receives his/her own separate bill, and becomes accustomed to paying on time.
Credit experts recommend that the child hold spending to 30% or less of the credit limit—which basically means putting no more than $60 on the credit card, and then paying that amount back. Parents can spring for a higher deposit if they think the adult child will be responsible for making higher payments.
Make sure the new credit card holder understands the interest rates, minimum payment and due date on the statements, and help adult children calculate how long it would take to pay off the balance making only minimum payments. Better yet, teach them that paying off credit cards in full every month is the only responsible way to handle them. Interest rates tend to be very high, potentially making this inexpensive solution a more expensive one.
Eventually, once the adult child has learned good credit card habits by using a card with training wheels, he or she can transition to an unsecured credit card. At that point, the secured card can be closed and your deposit returned. And voila! You’ve just helped your young adult move ahead on the road to a better financial future.
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The MoneyGeek thanks guest writer Bob Veres for his contribution to this post