Help Your Child Establish Credit Early

September 10, 2012

My son is frustrated and I think probably a bit mad at me (but he didn’t come out and say that). He just graduated from college and found out he has a credit score of 587.  That is a terrible score but then again, as I told him, he is a terrible credit risk. Why should he have a good score?  He just graduated, moved to a new city and got his first paycheck.  What bank would take a chance on him?

I  was thinking, “Hey , you are 22 years old.  What is the problem? You have plenty of time to establish credit.”  Well, he pointed out that he can’t even get a store card for 30% interest or a basic gas card.  He also may want to buy a house in a few years and feels like he has some ground to make up. I was amused at this, thinking I may have gone overboard in his financial coaching as a child. That said, he did need to establish credit.

The best way to establish credit is to get a secured credit card from your bank. Banks will issue you a secured credit card with poor credit but require you to place funds on deposit with them as collateral for your charges on the card. My son went with USAA bank and he opened a certificate of deposit for $500.  His card has a respectable  interest rate of 9.9% and an annual fee of $35.  Now he can make purchases every month – maybe use it for gas — but he will pay off the balance each month.  Upside – establishes credit.  Downside – ties up money in a certificate of deposit, the credit limit is low, and has an annual fee.

Another way is to have someone to co-sign for you so you can piggy back on their good credit.  Make small charges each month, paying them off regularly, and then eventually apply for a card in your own name.  Make sure to always make the minimum payment every month because paying on time makes up more than 30% of a credit score.

It is possible to be 22 years old and have a credit score of 750 or higher as my son pointed out to me.  Here are two ways to do it:

A responsible teen gets a student credit card or one co-signed with a parent when they are a senior in high school and living at home. They then use it sparingly and make regular consistent payments.  This helps in two ways – the payment history but also the bill coming to the home address shows stability.  This is how his friend who is still in college has a credit rating of 780.

Another way to establish credit in college is to get a car loan.  Another one of his friends (also a recent graduate) has a credit score of 750 because her parents put her as a signer on a car loan.  They decided to make payments instead of paying cash to help her establish credit – it worked.  The downside is they had to pay some interest on the car loan but with rates so low it may have been minimal.

I am told that because my son’s roommate has good credit, they were able to get a decent house near his work and he was not “forced to live near a place where he could be mugged or stabbed.”  (Let me ask you, do you think he is being overly dramatic? Just a tad, isn’t he?)

He does have a point though.   Establishing credit early can make it easier on college graduates (or anyone for that matter) who have enough on their minds worrying about getting a job or performing in the one they were lucky enough to get. They would like to simply use a credit card at a gas station once in a while.  It doesn’t seem like too much to ask.