Not sure what to give your older child this holiday season? Consider the gift of credit. If your child is at least a junior in high school, now may be a good time to teach them about borrowing and responsibly paying back money. This way, they’ll gain practice and experience, as well as a good start on their credit profile, while they’re still safely at home.
4 Options for First Time Credit Users
If you find that the gift of credit is perfect for your teenager, you have a few options to explore. You can co-sign for them to receive an unsecured credit card, allow them to be an authorized user on one of your accounts, help them to apply for a bank credit card or assist them with a deposit for a secured card.
- There are pros and cons that come with co-signing.
The big advantage with helping your child get a “real” credit card right out of the gate is that, if properly managed, this card will carry them right into their adult life. However, this option is only recommended for young people who have shown signs of being responsible and self-motivated.
This is because the bill will be addressed to the primary cardholder (the child), and most issuing companies will allow the child to raise the credit limit without the knowledge of the co-signer (parent). So, if a bill were to go unpaid, your credit score could drop, and that bill may be for more than you might expect if the spending limit has been extended.You can lessen the risk involved by always being the one who checks the mail. And while you don’t have to open the envelope addressed to your son or daughter, you can at least make sure that they do. You can also ask for verification that the bill has been paid on time.
- Making a child an authorized user is a good plan for parents with excellent credit.
It is usually very easy to allow your child to have access to your line of credit. Just call your issuing company, and they will send out a second card that imprinted with your child’s name. And when the child uses the card, their charges will appear on your statement.The only drawback to this arrangement is that you, the cardholder, will be responsible for any spending that your child does with the credit card. So, if they go on a spree, you’ll be left with the bill.The good news is that they can be immediately taken off of the account if card privileges are abused. And if you have a long history of timely payments on the account, they will benefit from all of the activity, giving them established credit that they didn’t have to earn on their own.
- Getting a credit card from your bank can be fairly easy.
If you have a good relationship with your bank, they will sometimes offer to issue your child a credit card when he or she opens a checking account. The cards function just like regular, unsecured credit cards, so make sure that your child is up to the responsibility of not overusing them and remembering to pay the bills.Unfortunately, bank-issued credit cards normally come with low limits and high interest rates, but they can be great cards to start out with if your child is willing to pay off the balance every month.
- Secured cards are best for kids who struggle with responsibility.
If you feel like your child may be tempted to overspend or get lazy with paying the bills on time, a secured credit card will eliminate some potential risks.The limit on a secured card will be established by the amount of the deposit you put down. For example, if you provide a $500 deposit, the card’s credit limit will be $500. There is typically an annual fee, and there may be expensive penalties attached if you daughter or son goes over their limit, but there are also some useful perks available.For a $29 annual fee, Capital One’s Secured card allows kids to monitor their credit score, and even comes with a credit simulator that allows them to see what would happen to their score if they were miss a payment. They will also be able to see how high their credit score will be if they continue to pay on time for an extended period.
No matter which option you choose, you can confidently give your gift of credit with the knowledge that you’re allowing your child access to the tools that will help them build a strong credit foundation. So, in the future, they will be able to buy a home or a car with relative ease.
Rebuilding Your Own Credit
If you’re looking for a second chance at building strong credit and are in need of reliable transportation, Auto Credit Express can help. We will connect you with a dealer who is qualified to handle your unique financial situation, and after you’re approved for your auto loan, your credit score will grow with every timely payment.
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