Cosign today. Help a student get approved.
Your child’s credit history plays a significant role in their lives, especially as they prepare for college (and let’s face it, your child is more a young adult now). Their credit will help them secure competitive rates on student loans, qualify for off-campus apartments, and, later on, get a job. In fact, the National Association of Professional Background Screeners found that 31% of employers conduct credit checks on some job candidates.
Your child may not have good credit yet, or may not have any credit history at all. According to the Consumer Financial Protection Bureau, 26 million Americans — many of them under the age of 25 — are credit invisible, meaning that they have so little credit history that they don’t have a credit score. If your child falls into this category, it can be incredibly difficult to qualify for loans, credit cards, or even get a cell phone in their own name.
However, there are things you can do now to help your child build credit before college starts.
1. Add Your Child as an Authorized User to Your Credit Card Account
If you have a solid credit history and a good credit score yourself, you can give your child a head start by adding them as an authorized user to one of your credit card accounts.
An authorized user is a secondary user on the account. They can use this first credit card to make purchases but aren’t liable for payments like the primary cardholder is. As the primary account holder, a credit card issuer will allow you to view all transactions the authorized user makes, or you can set spending limits on how the authorized user can use the card.
Why might adding your child as an authorized user be a good idea? Depending on your credit card issuer, your credit card account — and its credit limit and payment history — may show up on your child’s credit report. If you’ve had the account for years and have never missed a payment, your child will start building credit for your good habits. A debit card will not have the same benefits, but might be a good start for younger children before they are ready for the responsibility of a credit card.
2. Encourage Your Child to Complete the FAFSA for College
If your child will need to borrow money to pay for college, encourage them to complete the Free Application for Federal Student Aid (FAFSA) as early as possible to get federal financial aid, including federal student loans.
Unlike private student loans, federal student loans don’t require a hard inquiry from a credit bureau for undergraduate students or a minimum credit score. When your child takes out a loan, the loan will show up on their credit report, establishing their credit history. And, as they begin making payments, their payment history will boost their credit, too.
3. Cosign Private Student Loans
There are annual limits on how much undergraduate students can take out in federal student loans. Once your child reaches that cap, they’ll need to find other financing options to pay for their remaining college expenses. That’s when private student loans can be useful.
Private student loan lenders check applicants’ credit, so college students are unlikely to qualify for a loan on their own. You can help your child get a loan and start building their credit history by cosigning their loan application.
As a cosigner, you share responsibility for the loan’s repayment. But having a cosigner allows your child to get the money they need for school and potentially get a lower interest rate on the loan.
4. Consider a Secured Credit Card
Without an established credit history, your child is unlikely to qualify for most credit cards. However, they can start improving their credit by applying for a secured credit card instead.
With a secured card, your child puts down a security deposit that acts as their credit limit. Once they spend that amount, they can’t make any more purchases until they make a payment.
A secured credit card helps them establish a payment history, and some cards even allow students to earn cash back rewards on purchases.
5. Research Student Credit Cards
Once your child is in college, they may be eligible for a student credit card. Student cards tend to have less-stringent applicant requirements than other cards, so it’s easier to qualify for one if your child doesn’t have a lengthy credit history.
Your child may be able to earn rewards on select purchases, and some student cards offer perks like statement credits for good grades, signup bonuses, and free FICO score access.
6. Set Payment Reminders
According to the Fair Isaac Corporation, the organization behind the FICO credit score, payment history accounts for 35% of consumers’ credit scores. To help your child improve their credit, show them how to set up payment reminders for all of their bills and credit accounts, so they don’t miss a payment.
Encourage them to enroll in automatic payments if their creditors offer that feature. Some lenders, including Earnest, offer interest rate discounts when borrowers sign up for autopay, helping your child save money.
7. Teach them to budget and track spending
To build good credit and maintain their credit score, your child needs to learn budgeting and money management skills. Before your child leaves for school, make sure they know how to manage their spending and live within their means.
There are free tools they can use to track their spending and expenses. Mint, PocketGuard, and Wally and great budgeting tools for college students, and have apps your child can download to their phone.
Establishing Good Credit Habits
Your child’s credit history and credit score has a big impact on their lives and helping them build their credit before college can give them a solid foundation. However, make sure you also teach them the basics of personal finance, like the importance of spending less than they earn, limiting debt, and making all of their required payments on time. By establishing those fundamentals now, you can ensure they’re successful long after they graduate.