After living abroad for more than 20 years, I returned to find that my good credit history with European banks was not transferable. My credit history had to be built from scratch. It’s been an educational experience that I don’t intend to let go to waste.
While working on my own credit history, I am now opening up accounts, where possible, in my 15 year old son’s name. He has had a savings account for several years and understands the value of money and how interest rates work. Although parents will need to decide if their child is ready for the responsibility of a credit card, I personally feel that it’s never too early to have credit in your own name. While living at home, he will have the guidance he needs to understand the basics of managing his own financial affairs. Wells Fargo issues credit cards to 18 year olds with a $1,000 line of credit, but waiting until a kid is 18 to start working on credit and responsibility is a bit late. By that time, they are usually out on their own with the temptations of charging everything they might, or might not, need.
My credit union will open a checking account and a Visa First account for my son at 15, along with a debit card and ATM card. The Visa First card has a limit of $500, which is the same limit they gave me. The card holder needs to have a good credit history for two years before the credit union will raise the limit, no matter what your yearly salary is. Wells Fargo requires 3 years of good credit.
During those two years of waiting for credit history to accumulate, there are other ways to increase your rating. Using a checking account, an ATM card, a debit card, and credit card are all ways to gain points. Be sure bills are paid on time, don’t go over your credit limit or write checks with insufficient funds. It isn’t necessary to pay off the card each month, but paying more than the minimum amount is the best way to increase the credit rating. Paying the bill in full avoids costly interest payments and encourages better spending habits.
Look for different varieties of credit and use as many as possible. At first, department stores won’t be willing to issue you one of their credit cards, even if you have a good credit score. With less than 2 years of credit in your name, they aren’t willing to take the risk. Once you hit the magic 2 year mark, applying for a store credit card when you are making a purchase will often get you a discount, so you’ll be accomplishing two things at once. Many of these same department stores have student credit cards with low limits, and will approve the application if you are at least 16, have a social security number, a student ID and a second ID with a photo. It isn’t necessary to use the credit cards, only to have it on record that you were given a line of credit. Don’t use the credit card as an excuse to make a purchase if you don’t have the money to pay for it when the bill comes. That will be defeating the purpose of getting the card.
Another type of credit to expand your teen’s credit rating is having a utility bill or mobile phone bill in his name. Paying these bills in full and on time each month increases his credit score.
The different types of credit I’ve mentioned so far have all been free of charge if the bills are paid in full each month. There is one other way that isn’t free, but was recommended to me as a less expensive way to show my ability to make payments on a major purchase. Instead of paying cash for a car or large appliance, you can borrow against money you have in your savings account. The credit union is willing to give me a loan and guarantee the repayment with money they know I have. The difference between the amount I earn in interest on my money, and the amount I pay in interest on the loan, is less than I would pay for a regular loan. It’s true that I could just pay cash and not have to pay any interest at all, but the point is to have this certain type of credit on record.
By starting early with my son’s credit history, he will be able to have more financial freedom at an earlier age. He will have over two years of good credit history and a credit score high enough to be able to buy a car or rent an apartment or ask for a limit raise on his credit card. By the time he has worked a few years in his chosen profession, I’m hoping he will be in a position to buy his first home. Because he started building a good credit rating at 15 years old, a mortgage lender is more likely to take him seriously than someone who is just getting their first limit raise with a bank credit card.
It’s frustrating, but in this economy and with past experience making financial institutions wary of those who have no credit, it’s understandable. The best we can do is start early to build healthy credit scores and teach our children to be responsible spenders.