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Why It’s Wise to Start Building Good Credit Early

June 1st 2012 by
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In the credit-driven world in which we live, having a positive credit history is like having a sparkling academic record: It can play a vital role in helping a kid get where they want to go life.

So even though it could be years before your child even considers taking out a loan, buying a home or pursuing a career, helping a child to build good credit early — starting in their teenage years or even before — will serve them well once they hit the “real world.”

A credit history essentially gives financial institutions, credit card companies and potential employers an idea of how responsibly a person handles his or her money. When it comes time to rent a home or take out a loan to buy a car, for example, potential landlords and lenders tend to view a person who already has a positive credit history as less of a risk than a person who lacks such a track record.

The Why…
Let’s look at five key benefits of establishing good credit early:

1. Saving money – Generally speaking, the lower a person’s credit risk, the less they’ll pay to borrow money. The thousands of dollars a person can save (on interest rates, etc.) just by having a positive credit history makes a major difference, especially to young adults who are just finding their financial footing.
2. Getting a job – Employers are putting increasing weight on a person’s credit history during the hiring process, observes Erin Mentel-Gaeta, CFP®, at Cephas Capital Management in Columbus, Ohio. “It’s gotten to the point where credit history is seen almost as a reflection of a person’s character.”;
3. Securing credit – Generally speaking, people with a strong credit history have a better chance of landing a personal or business loan, a credit card, etc., than do people with a poor credit history or no track record at all.
4. Getting housing – Credit history is one of the first thing rental property owners look at in considering potential tenants.
5. Practicing responsible finances – Understanding the importance of paying bills on time, spending within one’s means and saving money for the future provides a solid financial foundation for the future.

The How…
The benefits of good credit are indeed compelling. What can parents/guardians do to help a child start building a positive credit history?

  • Open a credit union account in the child’s name, with a parent/guardian as account co-signer. A simple, no-frills, no-fee checking and/or savings account is fine. Giving kids the responsibility to balance a checkbook and the ability to write checks (with close adult supervision) builds financial awareness and competence.
  • Give a high school or college student a secured credit card (a card that requires a cash collateral deposit to create a line of credit). Here’s a way for your child to learn responsible spending under the watchful eye of a parent/guardian.
  • Give a college-age kid responsibility for paying a utility bill. Paying utility bills —electric/gas, phone, etc. — on time, and in full, helps build positive credit history. Just be sure your child is up to the task.

This article was submitted by the Financial Planning Association (http://www.fpanet.org/), the membership organization for the financial planning community. FPA members are dedicated to supporting the financial planning process in order to help people achieve their goals and dreams. Submission of this article does not imply an endorsement or recommendation of the Financial Resource Center site.

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