How To Help Your Young Adult Build Credit

Parents can assist their teen in establishing credit by explaining the workings and importance of credit, adding them as an authorized user on a credit card, adding them to an auto loan with their credit union, and opening a secured credit card.

Tip 1 - Explaining Credit 101

Whether you're 18 or 30, many people do not understand what is on a credit report and what is not. Your credit report includes details about your credit history, including the number of open and closed credit accounts you have, your history of on-time and delinquent payments, accounts that are in collections, the number of times you have applied for credit, and more. Credit cards, auto loans, home loans, and installment debt(personal loans) normally submit pay history once a month to the credit bureaus.

Creditors have to pay the credit bureaus for the service of reporting pay history. Therefore, some smaller lenders may choose not to report their pay history due to the expense. A lender may also choose to report to one credit bureau but not all 3 bureaus. This can be why you see a variance in scores among bureaus. Cell phone bill payments, checking account balances, and utility payments do not report to the credit bureaus each month.

Tip 2 - Training Wheels For Credit-Checking Accounts

Many banks and credit unions provide student checking accounts for minors or students but, if your teen is under 18, you'll need to be a joint account holder. Setting up a checking account can assist your teen in becoming familiar with making deposits, withdrawals, and managing their account balance. When your child is prepared, provide them with a debit card connected to their account. While debit card transactions don't impact credit scores, using one can help them prepare for their first credit card by requiring them to monitor their spending and account balance to ensure they have sufficient funds for a purchase. At Telcoe, the parent can request the daily limit of the credit card to be very low ($20-$30) to keep fraud or spending losses to a minimum before you are made aware. Account alerts that can go to the parent's phone (and students) can help you set up notifications to monitor account transactions.

Membership with Telcoe comes with so many benefits!

Tip 3 - Credit Builder Loan

A credit-builder loan assists in building credit by maintaining a record of timely payments. It also provides a savings boost, as you receive the loan amount once it's fully repaid. This type of loan is aimed at individuals with little or no credit history to help them establish credit. Typically, credit-builder loans are available from smaller banks and credit unions. Most loans range from $500 to $1,000 with a duration of 12 to 24 months. These are available to those who are 18 or older and have no credit history established. Funds are not received until the end of the loan as a reward for the on-time payments. A parent does not need to cosign for this loan product. Telcoe offers a great product. Learn more.

Tip 4 - Secured Credit Cards

A secured credit card is like an unsecured card but with training wheels. When your teen is ready to move from debit to credit, it can be a good place to start. It's easier to qualify for a secured card than an unsecured card, and it allows teens to build credit while reducing the risk of overspending and accumulating debt. Your child must be at least 18 years old to open a credit card, and they must show proof of income(paystub). A deposit is collected that is secured for the card limit. These funds remain on hold as long as the card is open. You can request the card to be converted to an unsecured credit card after 12-24 months with excellent pay history. For example, if you deposit $600 into a savings account, a card limit is established by freezing the funds on hold. This allows the student to make purchases, make monthly payments, and each month their score increases. Once approved for the card, use it once every 2-3 months, pay it off right away, and maintain a healthy credit score. Keeping the balance low or at $0 creates a low utilization rate and a higher credit score.

Tip 5 - Adding Your 18 Year Old To An Auto Loan

If you are purchasing an auto for your young adult to drive, why not add them to the vehicle loan to establish a credit history? Telcoe offers this service to our members. It's even great to add your teen when they turn 18 to an existing vehicle loan. While many lenders may not make this an easy process, Telcoe is happy to help. The loan will start reporting on not only the parent's credit but also your child's credit report. This is a very popular benefit of membership at Telcoe. Visit with our loan staff to learn more.

The Final Score

Establishing a credit history can be daunting and it doesn't have to be. Partnering with a specialist who can make the paperwork easy is the key. As a member of Telcoe Federal Credit Union, you and your young adult are on the way to meeting all your financial goals. So, don't wait. Reach out today by emailing Loans@telcoe.com or calling 501-375-5321. Tell them you read all about it here!