by Jan Combs, former financial aid officer at Harvard Graduate School of Education
As a parent of three children, I often think about how they’ll manage their financial responsibilities as they venture forth in life. Part of working towards financial independence is building credit. Establishing a solid credit history is one of the keys to financial self-reliance. Your credit score affects approvals and rates for car loans, personal loans, and mortgages. It also may be reviewed by landlords and cell phone providers. Building a solid credit history is vitally important.
Starting to build your credit early has its benefits. One way to build credit is to apply for it. Credit cards can help build a credit history, provide payment options to young consumers, and allow them to focus on money management.
Credit Card Options
Student credit cards are designed for applicants with limited (or no) credit history as most don’t require a previous credit history to apply. Many companies have programs for students that are tailored to their needs. Many offer school-related perks, like reward programs or cash back for maintaining good grades.
Become an authorized user on a parent or guardian’s account. When added as an authorized user on someone else’s credit card account, the activity on that card will be part of the authorized user’s credit history, allowing them to start building their credit record. When I added my oldest child to a department store credit card account, he was able to begin building his credit profile.
A secured credit card is similar to a debit card with an important difference. It is backed up by cash (one has to deposit their own money into an account in advance to cover future purchases), thus the actual credit limit is equal to the amount of the deposit. The important difference between a secured credit card and a debit card is that debit card transactions are not reported to credit bureaus, while activity on secured credit cards is reported. This helps to build a credit history.
Credit card use points to consider:
- Use the card(s) for small purchases each month that can be paid off by the due date. That way new activity is logged at the credit bureaus—part of building a credit score is having consistent account activity—and small charges count!
- Avoid large purchases, except in the case of an emergency. If a high-priced item does need to be purchased, create a repayment plan prior to buying the item.
- Pay off the balance each month by the stated deadline. Missing a payment, making a payment late, or paying less than the minimum amount owed is reported to the credit bureaus. These actions become part of the consumer’s credit history and negatively impact their credit score. One rule I have instilled in my children: follow healthy spending practices by using credit cards the same way they would use debit cards: make purchases only when they have the money to pay their bills in full each month.
- Monitor Accounts: Monitoring credit card accounts is a sound way to keep up with purchases, rewards, and due dates. Log in to credit card accounts to check transactions and balances regularly. Better yet, enable notifications to alert you when charges occur and bills are due. This helps you track spending and identify fraudulent activities.
- Request a credit report: Consumers are entitled to free credit reports from the three credit bureaus—Experian, TransUnion, and Equifax—and can request their free credit reports via Annual Credit Report. Consumers should check their credit history and be on the lookout for any suspicious activity and make sure all the accounts listed look legitimate. If you notice any suspicious charges, report them to the card issuer immediately.
- Be patient! When young adults use credit cards responsibly, they begin to establish a credit history. Although it is tempting to try to build a credit history quickly, know that it takes time. Young adults should try to fight the urge to apply for several credit cards at once. That could lead to greater utilization and debt. Start slow, then take on additional credit—and the responsibility associated with it—as time goes on and as income sources increase.