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Dollars & Sense: The Gift of Credit

By Roberta L. Nestor

Establishing credit is easy.  Establishing good credit is not, especially for a young adult.  Building credit is necessary if you want to take out a loan for a car, house, or even college.  It can take anywhere from months to years to reverse bad credit—so start off strong.  You can help your children get off on the right financial foot by helping them establish good credit—an incredible, priceless gift.

What is good credit for?  Less expensive auto insurance for one.  Most car insurance companies not only look at the basics of age, gender etc., but more companies look at your credit score before setting an amount.  Good credit is necessary for better loan rates not only for a car or a home, but for college as well.  If your college-bound student has good credit, they could get their own loan without tying your name, and credit, to a loan.  Landlords often do a credit check to make sure their tenants are financially trustworthy.  Cell phone companies may check credit as well; someone with bad credit may have to pay a deposit before getting a cell phone contract.

The easiest way to help your child build credit would be by adding them as an authorized user to your credit card.  You can add them, without giving them access to your account, from an early age.  Companies like Capital One, Chase, Bank of America, and Wells Fargo do not have a minimum age for an authorized user on a credit card.  By adding them as an authorized user, their credit will grow as you use your card and make monthly payments.

Before giving them access as an authorized user, set firm ground rules for what they can charge and how payments will be made.  If it turns out that they are irresponsible spenders or fail to make agreed payments, you can always remove them from your account, but if you cannot pay the monthly limit, it will be your credit that will also be adversely affected.

Once your children are college age and if they have established good financial habits, they can apply for their own credit card.  Credit card companies like Discover are more likely to offer a credit card as long as they can show some income – even a part time job is good enough for their first credit card.  They may have lowered credit limits, but that is okay.  It is a place to start to establish credit for the longer term.

Now the fun part, periodically checking your child’s credit rating.  Children age 13 or older can check their own credit the same way you do.  They can visit annualcreditreport.com.  This happens to be the only website federally authorized to provide credit reports from Equifax, Experian and TransUnion for free.  Also, Discover credit card actually sends you your credit score each month with their monthly statement.  Certain credit cards like Capital One allows you to check your score, for free, with Creditwise.

Help your child to understand what the credit ratings mean.  It will require six months of history in order to create a person’s first credit score.  Credit scores range from 300 (the lowest possible) to 850 (the highest possible).  Generally, most people will begin with a middle of the road credit score.  A missed payment (again, very easy to happen with paperless statements), a late payment, even late payments for college loans will all negatively affect their credit rating.  By helping your child early on to build credit, they can be sixteen and have an 800+ credit score.

Learning how to keep a good credit score is another generous gift to give your children.  Pay your bills on time.  Light but regular use of your credit accounts.  Pay balances in full.  Avoid closing accounts if you’re trying to build or improve credit.  A skipped payment could deteriorate someone’s credit by 100 points.

In life, you will need good credit if you want to rent an apartment, buy a home or to purchase a car.  Teens will appreciate the gift of good credit especially when they are taking out loans for college.  Good credit allows them to start their financial life on a good foot.  This gift of establishing good credit at a young age is priceless.

Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services.  She offers securities and advisory services as a Registered Representative and Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser.  Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth.  Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice.  You should consult a legal or tax professional regarding your individual situation.  Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

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