Building credit is a tricky process. It is hard to get approved for new credit without already having a good credit score, making it a catch-22 for new students. However, there are some great options available for students, and it can be helpful to know and understand them so you can guide your young adult towards becoming financially responsible.
If your child is under the age of 21, they will most likely have difficulty getting a line of credit. Without a job or a steady source of income, you may need to co-sign any applications. Some parents are willing to co-sign, while others are not. This is a decision you will need to make with your student on an individual basis.
Consider a Federal Student Loan
If you are in the position of seeking financial aid for college, consider taking out a federal student loan. Oftentimes, you need good credit to secure a loan. Most federal loan programs, however, do not require a credit check – unlike with private lenders. Borrowing the money you need for tuition can be an opportunity to build your credit at the same time.
Get Credit for Rent Payments
If your child is renting an apartment for college, there are several services willing to report your good payment history to the three credit bureaus. Your landlord must agree to sign up for the service, and it does cost a fee for each transaction – but a few dollars might be worth paying to build your student’s credit score. Just be aware this service could work against you if the rent is not paid on time or if there is a missed payment.
Become an Authorized User on a Credit Card
Another option is adding your child as an authorized user of your credit card. This means you are granting your child permission to use your credit card to make purchases; however, the legal responsibility to pay the bill still belongs to the owner of the card. It can also have the opposite effect on your student’s credit if the primary card holder misses a payment or carries a large balance on the card. There are also specific credit cards designed for students. If becoming an authorized user is not an option, having your child open a student card may be an alternative.
Practice Good Credit Habits
Practicing good credit habits shows lenders you are not a credit risk, which boosts your credit score. Knowing how credit scores work can help you keep your credit score healthy, and help you set a good example for your student. Make small purchases on a credit card and pay them off on time and in full to increase your score. Do not open too many new credit accounts at the same time. Lenders may see it as a risk, and it can actually hurt your credit score in the long-run.
The sooner you start to teach your children about healthy credit habits, the better they can build their credit up when they are able. This is a valuable skill that will help them on their way to college and later into life.