Credit in the Straight World
Last month, the financial planning department did a presentation to clients on financial planning basics (see Financial Planning 101 video below). If you missed the presentation, or are interested in any of the material that we discussed, please feel free to reach out to anyone in the planning department or watch the video below. One part of the discussion was in regard to credit and debt. And one related question we received was how to build credit. Since my son is currently living on his own, but with no actual bills in his name or debt to pay off, he does not have a credit history. At some point, when he wants to apply for a credit card or loan for a necessary larger purchase, ignoring his credit history is going to create a significant roadblock. It’s best to address these things well before they become a problem. Therefore, I thought I would do a little more digging on the subject.
One of the suggestions we made in the presentation was for a parent to add a child to their credit card to help build credit. So, how does that work? Essentially, you add the child as an authorized user to your credit card. In order for this to be an effective strategy, you may want to restrict the child’s use of the credit card, or have a good understanding of how they may use the card. As an authorized user they are benefitting from your credit history, without shouldering any of the responsibility for paying the bills. This could easily get out of hand. In college, I knew plenty of people who paid for group dinners with their parent’s credit card.
Another suggestion, which carries a similar risk, is to co-sign on a credit card or other loan. Again, you would be responsible for paying the debt if your child is not able to do so. It is important that you know your child’s financial situation and are confident that they are able to meet the necessary payments, in full and on time.
If you prefer to not be on the hook for your child’s debts, they can start building credit with a secured credit card. A secured credit card is one that is backed by a cash deposit, which also serves as your credit line. It is basically a pre-paid credit card and, if managed appropriately, will help build credit faster than simply being on a parent’s card. Be sure to look for options that have low or, ideally, no annual fees. With the secured credit card, it is essential to use it sparingly and pay off the balance in full each month. As your credit improves, you may be able to transfer the existing card to an unsecured status. If this is not the case with the secured card you have, you can always apply for a new, unsecured credit card once credit history is sufficient to do so.
Another option to build credit is a credit-builder loan. These loans are not only useful for younger adults to build credit, but can also help those with damaged credit to rebuild it over time. You are more likely to find credit-builder loans through smaller banks and credit unions. There are also online lenders, such as Self, that offer small loans with interest rates that are relatively competitive with credit card rates. The Self loan is actually held in a Certificate of Deposit (CD) until the loan is paid off, at which point the principal amount is returned to you. Along the way, your payments are reported to each of the three major credit bureaus, thus building credit.
I’m pretty sure I built credit through a combination of being an authorized user on my parent’s card (with strict instructions never to use it) and applying for my own credit card once I was in college. Those were the days when credit card offers were everywhere on campus. I’ve always accepted the responsibility of maintaining a good credit profile.
I hope that my son is able to use this information and build his own credit in a smart and efficient manner. He always knows I’m here to help him out, regardless.
Financial Planning 101
Financial Planning 101 focuses on financial planning basics, making it suitable for our younger clients, or children/grandchildren of older clients and why financial planning matters, even if you have a professional managing your money.
Presenters: Kristan Anderson, CEBS®, CFP® Director of Financial Planning, Rick Gibson, CFP® Senior Financial Planner, Rasti Nikolic, MBA Associate Financial Planner, and Victoria Henry, CFP® Relationship Manager
- "The Giving Tree" By Cheryl Langston, CFP® »
- "All the Best Intentions" By Angela Baker, JD, CFP®, CDFA®, RICP®, CLTC, CASL® »
- "A New Rung on the Bond Ladder: Hybrid Preferreds" By Matt Cohen, CFP®, CIMA® »
‘How Young Is Too Young to Start Building Credit?’, nerdwallet.com.
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