Has anyone ever counted the lessons they taught their son? We spend 18 or 19 years raising our sons and instilling life lessons into them. We hope we have given them enough to navigate the world before them. Some attend college before finding a job, and others enter the workforce immediately after high school. The time finally arrives for your son to purchase something on credit, whether it be his first car or furniture for his new apartment. They tell him he is denied – not for having bad credit, but for having no credit experience.
The CARD Act of 2009 was created to make things more transparent for the consumer. It also prohibits credit card companies from issuing credit to anyone under the age of 21 unless they have a cosigner or proof of adequate income. Applicants are also under a few more restrictions, most notably that they cannot receive a higher credit limit without the permission of the cosigner.
So what can you do to help your teenager build his credit?
Add him to your account as an authorized user.
While one of the easiest solutions, carefully consider your own finances before adding Junior to your account. You should be in good standing with the credit company, and have the means to cover any missteps your son may make. Also consider if this is your only emergency fund. If you have to use your credit to cover an emergency in the future, you could end up hurting his credit instead. The good news is that as an authorized user, he is not responsible for making payments if you fail to do so.
Check with your card issuer on the fine print. Many will allow you to add a minor to your account but set a minimum age. Others may hit you with an annual fee for adding users. Will they receive a different card number, allowing you to differentiate between purchases? Another perk to look for is setting a purchase limit. Check on how they report to the credit bureaus – will it really benefit your son?
Cosign for him
If your son is between 18 and 21, you might consider letting him apply for his own card, and cosigning for him. You act as the guarantor to the credit company that you will cover payments if your son is unable. The difference between being a cosigner instead of an authorized user is that both parties are responsible for ensuring payments are made.
Depending on the company, you may request a release to be removed from the card after a certain number of payments are made or the initial applicant has reached a certain age. Keep in mind that his credit usage will also affect your credit score. A good rule of thumb is to keep credit expenses under 30% of the credit limit.
What age is a good age to start building credit?
That question depends on the trust your son has built with you and on his maturity. Some cards allow you to an authorized user as young as 13, but many suggest waiting until they are at least 15. A few good years of credit will help more than many average years.
As with any financial decision, take time to talk with an adviser and make sure everyone is on the same page. Research the different perks and fees involved with each company to find the best fit for your family. And finally, teach your son to spend responsibly. Being transparent about your own mistakes in the past may help him avoid the same pitfalls.
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