In my last journal, Talking To Your Young Adult Children About Credit, I reviewed some crucial information we should be teaching our young adults to prepare them for the world of credit. If we aren’t teaching them at least the basics, they may get into debt way over their heads at an early age that can have severe consequences that could take years to recover from!
Here’s an excellent example of the consequences bad credit can have:
Someone with a credit score of 599 could pay 14.99% interest for a car loan as opposed to someone with a credit score of 730 who would pay 1.99%. On a $23,000 care, the person with a low credit score could pay almost $10,000 more for the same car at the same price and the same number of payments.
We want our adult children to be financially responsible – and we would love to see them save for all their needs and wants and be able to pay cash for everything but that’s not realistic for someone starting out in the world with low paying jobs and big dreams ahead!
So how DO they build credit, when it’s hard to even start? Below are some practical ways for them to start building a credit score once they turn 18.
- If they don’t have one already, help them open a checking account – and a savings account. Show them in the fine print what an overdraft fee is and how much it will cost them if they overdraw – and how that can negatively affect their credit. Start them out managing one thing first, not multiple things at one time. Teach them how paying bills on time, every time, can help with their credit score. Remind them that saving money regularly is as important as paying bills – a regular scheduled transfer into a savings account could be treated just like a payment, except they are paying themselves.
- If you as a parent have credit cards (gulp, ya’ll know how I feel about credit cards, right?) and you’re in the process of paying them off and don’t have plans to use them again, you could add your young adult as an authorized user. You don’t have to give them a card, just add them on. Your solid, on time payments will reflect on their credit score just like it does yours.
- Get them their own phone plan. Teach them how to set up their payment on autopay so the monthly bill is always paid on time. This is a perfect time to teach them about a budget so they can manage their money to pay everything on time once they move out from under your wing.
- You as the parent could co-sign for a loan – if they are in need of a vehicle, or a small student loan. Don’t encourage getting a loan just to get a loan to build credit. But remember, that loan is as much your loan as it is theirs – it will show up on your credit as well and if they don’t pay payments on time it can affect your credit. You know your child and their responsibility level. Don’t put yourself in a bad situation if you know your young adult is not ready for that responsibility.
- Teaching them to always live well below their means. They don’t need a $40,000 car when a $10,000 car will last them for years and have a fourth of the car payment.
- If they do get a loan, it’s an excellent time, and not too early in their lives, to teach them about the debt snowball method of getting out of debt quickly. When the payments on a dependable used car are well below what they can afford, they can always pay it off quickly so they can save and pay cash for the next car.
- When they do move out on their own, they can grant credit bureaus access to their telecom and utility bills – essentially using those as “credit” reported to the bureaus, just like real credit.
These are just a few ways to help your young adults start the path to building credit, and a good credit score. Notice how many of these are “teachable moments” that can have a huge impact on their financial future. Don’t assume they know all the things – remember back to when you were their age and some of the crazy decisions you made with money. Teaching responsibility at a young age will help your stress level, and theirs! Good luck Mom and Dad!