Building Credit
If you are currently in college, or have recently graduated from college, you know how difficult it is to get a credit card due to a lack of credit history. For those of us who are a little older, this may seem unbelievable, because when we were in school, credit card offers would literally pour out of our mailboxes.
In the past, credit companies would practically beg college students to sign up for low-balance student cards, but thanks to the credit collapse of 2008, that story has drastically changed. It is now nearly impossible to get accepted for a credit card if you have no previous credit history, and this is really hurting a lot of young adults who are trying to get on their feet.
Why You Need to Build Credit
It is a giant “Catch 22” You need a Credit History in order to Build a Credit History
Building Credit History—natloans (Flickr.com)You have to have credit history in order to buy or lease a car… buy a home…be considered for a loan…
And when do people usually first need loans? Two to three years after graduating from college. Without a credit card, college students can’t build the credit they need to do these things, and this is why it is important for parents to start helping their kids build their credit starting their freshman year.
How Parents Can Help Build Your Credit
Parents can help their children build credit by opening a joint account with them; with parents as the owners and the child as the authorized user. Have one card designated as the “credit-builder card.” Only use it to buy things like school textbooks or supplies, and pay it off as soon as you make purchases. This will teach your children good credit spending habits and slowly build their responsibility. It will require parents to constantly monitor the card’s use and stay on the child about making payments, but if the student is mindful, there shouldn’t be any problems.
If a parent is concerned that
their child isn’t ready to handle the responsibility of charging and paying off credit debt, then they should consider making them an authorized user on one of their regular credit cards but not giving it to them for actual use. The credit card’s history will be shared between the parents (owners) and the child (authorized user), and the child will then have their own credit history without actually making any purchases. In addition, once the child is able to open a credit card account on their own, the joint account should be closed to sever the ties.
Keep in mind that this idea only works if the parents have good credit history and are responsible with their payments. A parent with bad credit history should never open a joint account with their child, because they will only bestow bad credit to their children, defeating the entire purpose.
If it is the case that a parent has bad credit history, then they should discuss the consequences of this with their children; being completely honest about how it has affected their finances. This is the only way a child can learn why it is not OK to spend beyond your means and miss payments; a lesson that will grow in value as time goes on.
If Parents Can’t Help
For those children who can’t be made authorized users on their parents’ cards, it is always worth a shot to look for a credit card that will accept customers with no credit history. There is an interesting catch to this, though. Interestingly, there are still a few cards out there that are just for students, such as the Discover Student More Card and the Citi Platinum Select Visa Card for College Students. However, if you wait until after graduation to sign up for a credit card, your only option may be a secured credit card. Student Credit Cards
Secured credit cards require you to provide a cash collateral that acts as your credit line. For example, if you put down $500, you will only be able to charge up to $500 on your credit card. Most secured credit cards are offered by major banks and credit unions and usually require you to use the card for two to three years before being upgraded to a regular credit card. You will also only get your collateral back once you have been upgraded. After a few months of use, some issuers will increase the credit line for good customers without asking for more collateral. Secured Credit Cards
If you feel confident that you can resist the temptation to overuse your credit card and know you can make your payments on time, it is best to open a student card as soon as you can while in college. This will allow you to avoid the pesky policies of secured credit cards.
The real reason it is so important to build your credit early is so you won’t have to rely on others to co-sign for major purchases or leases. This is not only annoying for you, but it is also a risk for co-signers, who make themselves partly responsible for your debt by agreeing to sign.
See Also:
All Kinds of Credit Cards- Find the one that’s Right for You
The Secret to Making More Money: Stay in School
6 Ways To Control Impulse Spending
4 Easy Ways to Build Your Credit During College
About the Author:
Eliza Morgan spends most of her free time writing (or thinking about writing). As a full time blogger and freelance writer, Eliza offers insight into secured business credit cards and other business related topics. Questions and comments can be sent to elizamorgan85@gmail.com.
