From Cap and Gown to Credit Card?

Whether your high school graduate is about to land their first full-time job, go off to college or begin another endeavor, he or she is also taking one more step through young-adulthood. Their needs are likely evolving too, and that can include having access to credit and developing a personal credit history. Since financial education isn’t typically taught in school, it’s our job as parents to provide our children with the knowledge and skills they need to create good financial habits.

For recent high school grads (as well as others under age 21), there are rules to be aware of when it comes to obtaining credit. Those who are at least age 18, but are still under age 21 and who don’t have a credit history, may have difficulty getting approved for a credit card of their own. In any case, an applicant would need to show proof that they have their own income, and at very least, a level of income that would be sufficient to repay amounts that they borrow.

Sometimes a parent may consider adding their son or daughter as an authorized user on their own account in order to give the child the ability to use a credit card, which would give the child a start in establishing a history of using and managing credit. Keep in mind, because they are technically not responsible for paying the bill, being an authorized user may not have a significant impact on their credit score.

You may want to consider having your child apply for a secured credit card. This will require an upfront deposit but because they are the primary account holder this will have a much bigger impact on their credit score by proving they can manage their own card.

Using Credit Responsibly

Regardless of his or her age, if your child is getting access to credit for the first time, you don’t want to miss the opportunity to impart some (more) of the kind of parental wisdom that your son or daughter will (almost certainly) thank you for down the road. Looking back on my college days, I wish my parents would have shared more of their financial knowledge with me before I was bombarded with credit card offers on my first day at LMU.

Consider the following basic, but very important credit card lessons:

Use for convenience but don’t get carried away. Having a credit card can save you from needing to carrying large sums of cash which may be lost or stolen.

Keep track of what you charge. Keeping track of what you buy with your card will help you plan for how much you’ll need from your savings or checking account in order to pay the balance in full when you get the bill …

Ideally, your child would be nodding his or her head at this point, and saying: “… so that I    don’t end up paying interest, right?” If you happen to get a less demonstrative response, or if you just want to make sure that those dots are being properly connected, go ahead and add….

… because if you pay for things with your credit card and you don’t pay off the whole balance by the time your next payment is due, there will be interest charged, and interest accumulating on your unpaid balance can become expensive.

Use your card wisely. Paying off all of your charges by the payment due date not only saves you finance charges but ensures you have enough credit remaining in case of a financial emergency. Remember that you won’t be able to predict the timing of a potential financial emergency but you also can’t predict the potential cost either. That’s another reason to avoid building up charges for everyday “wants” rather than “needs.”  

Your activity will be tracked.  How you manage your debt, starting with your credit cards, will be reflected on your credit reports, and in your credit score, and these will have an impact upon several areas of your financial life going forward. Your credit history and/or your credit score will be reviewed if you apply for future credit cards, but can also be checked when you look to rent an apartment, buy insurance, and even when you apply for a job.

Continuing Along the Path

It could have been Algebra before Geometry, or Biology before Chemistry, but chances are that throughout high school your child became accustomed to having to complete certain courses before enrolling in higher level ones. So maybe you can frame your discussion with them about using credit responsibly as another “prerequisite”; one that will let them move on to higher level challenges, like saving for their first home, or maximizing their employer provided benefits, or even teaching valuable financial lessons to their own children someday.