If you've got a recent high school graduate who's getting ready to head off to college or join the workforce, let me share a few lessons I learned the hard way about managing personal finances that you can pass along to your kids.
Young adults are just starting to build their credit history. In the coming months they'll probably encounter many unfamiliar expenses -- and many financial temptations. If they're not careful, a few ill-thought decisions made now could damage their credit for years to come.
Among other things, a poor credit score can:
Here are several actions your kids can take to build good financial habits and strong credit -- and a few minefields to watch out for:
Probably the most fundamental tool for young adults to help manage their finances is a basic checking account and debit card. A few tips to pass along:
Credit cards for young adults can be a useful tool, but they must be used responsibly. By law, people under age 21 must have a parent or other responsible adult cosign credit card accounts unless they can prove sufficient income to repay the debt.
Although this policy probably prevents many young adults from amassing credit card debt they cannot afford, it may also make it more difficult for them to begin building a credit history. Parents can help out in a few ways:
Another way to build credit history is to start out with a "secured" credit card -- a card linked to an account into which you deposit money. (Regular credit cards are considered "unsecured" because they aren't tied to underlying collateral that can be seized in case of non-payment.) Typically users can charge up to the amount they've deposited and then replenish the account with more funds.
After they've made several on-time payments, have your kid ask the lender to convert it to an unsecured card, or to at least add an unsecured amount to the account. Just make sure that the lender agrees to report your payment history to at least one of the three credit bureaus; otherwise, the account does nothing to improve your credit.
If they do qualify for an unsecured credit card, have your kids follow these guidelines so they don't start off on the wrong foot:
To learn more about building and maintaining strong credit, visit What's My Score, a financial literacy program for young adults run by my employer, Visa Inc., which features a free, comprehensive workbook called Money 101: A Crash Course in Better Money Management. Also, check out my previous blogs, Understanding Credit Scores, and Improving Your Credit Score.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
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