If you have a son or daughter on their way to college or currently enrolled, now is the time to start thinking about how they will handle issues related to credit. A good credit standing can have a positive impact on their job search when their college years are over. Most students, however, don’t realize how crucial this can be and oftentimes they cruise their way into a bad credit spiral.
Most major companies run credit checks on potential job candidates as a matter of course these days, so it is important that your offspring pay careful attention to their credit report if they hope to land that all-important first job. Two things are worth paying attention: choosing the right credit card and establishing credit though a “friendly” financial institution.
Credit Union sign-up
Let’s look at the second item first. I would recommend you enroll your son or daughter in a credit union as early in the game as possible. Most credit unions allow membership to families of credit union members while a few actually take “walk-ins.” If you have a family member who works for federal, local or state government, or who is a teacher, it is likely he or she belongs to a credit union and can sign you up for membership. This is completely different from co-signing and perfectly safe from a financial standpoint for the family member.
Credit Unions are great places to start a savings account. They also tend to offer free checking accounts and fairly gentle terms for car loans. Credit Union auto loans are often three to five percent below bank auto loans and are usually available after 6 months of membership. Rather than buy a car under your own name for a student going off to college, apply for an auto that you co-sign at the Credit Union. Even if you are the only one making the loan payments, at the end of four years of college, your child will have developed a track record that will show up as more than a blip on their credit report score.
Secured Credit Cards
Your offspring may choose to establish credit with a secured credit card or risk the commercial credit card offers that flood students’ mailboxes. There is a lot less risk involved with the former, which limits the amount of credit available to the extent of your deposit in a fixed account. After three to six months, their financial institution will convert the secured credit card to a regular card provided the payments have been made on time. Unfortunately, your son or daughter may decide to take matters in their own hands and take advantage of a hard-charging pre-approved offer.
Your only solution is to attempt damage control by educating your student on reading the fine print in these juicy offers. Most credit card offers trumpet zero percent offers for six to twelve months. Even experienced adults have a hard time looking pastthe zero in bold type and reading the print on the back of the offer. And astoundingly, some of these back pages are printed in lighter colored ink! The most important item on the back page will be what the credit card company will do to your child if they fail to make even one payment on time. Quite often, the zero percent rate will jump to 5 or 10 percentage points above the prime rate, and may thereafter rocket to 25 percent and beyond.
Incentive Program
If your college student has lost a job and is temporarily unable to pay their credit card bill, be prepared to step in and help out. And in order to ensure that you do not topple under the weight of their monthly payment, set up an incentive program before they go off to college. Draw up an agreement with your student that says you will pay $100 per month for two years on their credit card bill if they can prove they did not miss a payment through college. If they missed a payment, drop your offer to $50.00 per month, and if they missed two, your offer goes down to $50.00 per month for one year. Withdraw your offer if they have obviously made a hash of it throughout their college life.
Of course, it’s never to early to teach your children about the vagaries of credit and it’s best they learn at home, under supervision. Lessons learned before they go off to college may ensure that they enter the working world with a solid credit report and a good shot at saving themselves the burden of onerous interest rates later on.
