By Colleen S. Krcelich, CPA
Before you know it, your son or daughter who just entered freshman year at college will be graduating, searching for a job, and looking to buy a car or rent an apartment. They may need to refinance student loans, or potential employers may consider your child’s credit history when they are looking for a job.
Your child’s credit history will play a big role in all of these decisions: it can affect the interest rates offered, and even car insurance premiums. You can assist in all these areas by helping them establish credit while still in college.
The quickest and easiest way to help them establish credit is to include them as an authorized user on one of your credit cards. Allow them to use the card to buy books, personal items, and other things they need while in college. To do this, you will need to call the credit card company and make sure they will report the card activity under your child’s Social Security number as well as your own. Not all companies report the activity for all authorized users. Also, make sure it is a card that carries a small monthly balance or gets paid off in full each month. The balance amount compared to the credit limit is heavily considered when calculating a person’s credit score. Be aware that you are solely responsible for making all payments on this card as far as the credit card company is concerned. This shared method will not drop your credit score because, as the card owner, you are not applying for new credit; however, it will drop if the balance increases significantly.
Another option is to apply for a new credit card as joint card holders. Assuming you have strong credit, you should be approved fairly quickly. You and your child will both be responsible for payment of any balances on the card. This will affect your own credit score and credit history. This could be a problem if you are looking to secure a large loan in the near future, possibly an auto loan or mortgage. Your credit score will drop a few points because of the hard inquiry, and will probably also drop if there is ever a balance on the card. It will certainly drop if the balance on the card approaches the credit limit.
If you are concerned about your child’s ability to control his or her spending on the above cards, or can’t risk any changes to your credit score as noted above, a third (and possibly safest) option is to fund a secured credit card in your child’s name. When you open a secured card, you will be required to deposit a fixed amount of money into a savings account with the issuer. Your son or daughter will be issued a credit card with a limit equal to the amount of your deposit. If they fail to make a payment on the card, the issuing bank will deduct the balance from the account.
It is important that the card is used each month and paid in full. A card that is not used will not have much effect on your student’s credit score. One way to do that is to put a small recurring charge on the card each month, such as a Hulu, Spotify, or Netflix subscription. Set up an automatic payment from your (or your student’s) bank account. Ensure all minimum payments are made on time; better yet, pay off the entire balance in full each month. Have a discussion each month about the charges that he or she charged to the card, and who will be responsible for the payment. If the balance cannot be paid in full each month, you or your student are living beyond your means.
As a parent, you help your child in so many ways while they are in college. Helping them establish good credit before graduation is one more way to ensure they start their adult life on the right foot.
Colleen S. Krcelich, CPA, has her own public accounting practice in Bethlehem, Pa., and is assistant professor of accounting at Cedar Crest College.
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