Forethought: Credit can give young adults a huge boost in life, or it can become the catalyst behind their financial destruction. Let’s assume, the first scenario becomes your now-adult child’s reality. A properly enhanced credit portfolio can open up world’s of opportunity for a student, a young entrepreneur, or a world traveler. As a young woman, I had access to more credit than most of my peers. Unfortunately, I didn’t have any real use for it, but I hope that my son will. Here is how you can build a child’s credit and score.
1) Open a savings and/or checking account for your child.
To build credit is to prove financial responsibility. An active bank account is the first step.
2) Apply for credit using your child’s information.
This initial application for credit will be denied since your child has no credit history. But it will create a new file for your child within the credit bureau. Given that these quick loans are advanced to you against your salary, you are expected to pay them off with the next wage cheque. Thus, the loan duration is in between one and 2 weeks. This file will become the platform from which all new credit will be built.
3) Add your child to your credit line.
Not too long ago, if you added someone to your positive credit line, the added cardholder could see an increase in their credit score. Now the rules have changed. Being an addition to someone else’s credit line is no longer beneficial to the added cardholder’s score. But it still seems to open the door for new credit opportunities.
4) Sign for a secured bank credit card.
Go to your bank, and open up a secured card in your child’s name. A secured card is such because it is “secured” with a cash deposit. The institution will report the secured card to each credit bureau.
5) Accept credit card offers for your child.
Accept offers that are in the best interest of your child. Refuse offers that have excessive interest rates (+15%) or yearly fees (over $50).
6) Monitor your child’s credit.
Monitor her credit report for fraudulent activity. You can request one free credit report from each of the three bureaus each year for free. Every few months, go to each credit bureaus website and access the option to “Dispute” an entry on your credit report. (This option is always cleverly hidden in the footer of the site’s homepage.) Once you’ve logged in, you will have free access to what’s currently on the report without having to actually pay for it.
Also be sure to monitor each credit account for fraudulent activity or excessive spending. Mint is a great tool that sends alerts when pre-set spending limits are exceed, or when financial goals are met. This is a great way to keep track of your child’s spending habits, especially when they enter the teen years and shopping becomes cool as water.
The 3 major credit bureaus are Experian, Transunion, and Equifax. To obtain your kid’s free credit report from all bureaus at once, go to Annual Credit Report. This service is maintained by the big three credit bureaus just mentioned, and doesn’t require you to input any credit card information.
7) Nourish your child’s credit.
By nourish, I mean to watch it grow. Don’t squelch it for your own needs. (Parents have been sued by their own children for such financial transgressions.) This credit line is not for you or your household, it is for your child’s future betterment. If you can’t resist temptation, when a new credit card arrives lock it in a safe or cut it up completely.
8) Educate your child about the importance of credit, and how easy it is to destroy.
From early on, you should allow your child to make small purchases (under $30) with a credit card. Using the credit and maintaining balances helps to increase your credit score, so if that is your purpose, you must allow your kid’s cards to be utilized from time to time. But you must also require that he pay the credit card off entirely each month. Allowance, babysitting money, chores– however he earns the money, it must be used to pay off any outstanding debts.
Cafe Credit – Free Credit Score Checking Tool is one of my favorite credit tools. It allows you to play with different credit scenarios. What happens if you are delinquent on one account, file bankruptcy, pay off your credit card balance, or open a new credit line? Just select the options within the tool, and your score will be adjusted with each new positive or negative scenario. What I like best is that it’s absolutely free, no strings attached.
9) Maintain the same address on your child’s credit history (if possible).
The number of years that your kid has lived at a specific address shows stability. Young adults have a tendency to move a lot, so encourage her to keep her account address consistent instead of changing it every time she moves to another dorm room.
Since your interested in your child’s future, why not introduce them to the world of work?