Teach Your Kids to Score with Credit

September 9, 2012 1:50 pm0 commentsViews: 13
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8123.114126.medAre your children starting to take their first steps toward independence? Make sure some of those steps help them establish good credit, which will ultimately make it easier to secure a mortgage someday – and at favorable interest rates.

The first step is for your children to open savings and checking accounts, which indicate stability and fiscal maturity to lenders. They also need to establish a borrowing history, which can be done in two ways:

1. Add them to your credit card account as authorized users. This generally means your history with that card can be sent to their credit bureau file, giving them an immediate credit record. If you have a good track record, it will reflect well on your children. However, if you have mismanaged your account, it could be more difficult for the authorized user to get credit in the future. Also, keep in mind that some credit card companies won’t send reports on authorized users to the credit bureaus, especially if the user is not the original cardholder’s spouse.

2. Open their own credit card accounts. A good time for young people to get accounts is when they are high school or college students. Credit card companies view college students as good credit risks because they assume that parents will pay whatever bills their children cannot pay. However, be aware that many students find the temptation of credit to be too much. They charge thousands of dollars and wind up saddled with debt throughout their young adult lives. Talk with your children about what good credit management means (see right-hand box for some steps).

To create a FICO score, your children will need credit for at least six months and must use at least one of their credit accounts during the preceding six months. Encourage them to be prudent in their spending but to use their credit cards regularly. This will give them a regularly updated credit report and ensure that the card issuer doesn’t terminate the account for inactivity.

When it comes time for them to buy homes, your children will find differences in the ways mortgage companies evaluate FICO scores. For instance, acceptable but lower scores may require a more thorough underwriting. Some lenders reduce the points on a loan for credit scores above a certain level and, conversely, some establish a base rate and then charge an increasingly higher interest rate for those with lower credit scores.