How to Help Your Young Adult Build Credit History

Having good credit is critical when it comes to getting a home or a car loan. Sadly, many young adults have less than perfect credit or no credit at all. This can make major purchases difficult and costly.
If you have a young adult or child close to becoming an adult, you can take some steps to help establish their credit. Here are seven steps that you can take starting today.

7 Tips to Help Your Young Adult Build Credit History

1. Have the young adult become an authorized user on your credit card.
   Perhaps one of the safest ways that you can help your young adult establish credit is by making them an authorized user on your credit card. You will want to make sure that this credit card has a limited credit line to prevent out-of-control spending.
   
   The purpose of putting your young adult on your credit card is to help establish a credit history quickly. By placing your young adult on your credit card, you will be able to monitor their spending habits better to avoid getting into serious debt. 

2. Open a student or a secured credit card
   Student and secured credit cards can be a great choice for your young adult. A student credit card is designed to be relatively easy for college students to get and generally comes with a low credit limit. Some student credit cards will increase the limit after the first five or six on-time payments. When it comes to a secured credit card, your young adult will put down the entire credit limit into a savings account that will act as collateral.
   
   It is also important that the user limits credit utilization to under 20%. Using too much of the credit card limit can negatively impact a credit score. 

3. Make sure they pay their student loans on time
   If your young adult has student loans, be sure they are paid on time, every time. Student loans are reflected on a credit report and have a significant impact on the overall credit score. It is a good idea to remind your young adult child not to ignore on-time student loan repayments.
   
   One of the best ways to ensure on-time payments is to automatically deduct the payments from the account holder’s bank account. Doing this can also help avoid having to deal with any late payment penalties. 

4. Assist the young adult in taking out a credit builder loan
   Another way that a young adult can build up credit is through what is known as a “credit builder” loan. The purpose of this loan is not to take out money to make a purchase but to keep the money in their bank account.
   
   When it is time to pay back the loan, the young adult will use the money from the loan to pay back the lender. The account holder will have to pay out of pocket for the interest on the loan. However, it may be a small price to pay to build up the account holder’s credit score. 

5. Add utility bills to their credit report
   Most adults will have utility bills on their credit reports. The faster that a young adult can put a utility bill on their credit report, the better.  You can assist your young adult by also putting your name on the utility bill.
   
   After about six months of on-time payments, your young adult will notice an overall increase in their credit score. 

6. Cosign on an apartment lease or automotive loan
   The chances are that your young adult will want their own place to live and own vehicle. Both expenses can go a long way to build up credit. You may consider cosigning both on the apartment lease and the automotive loan.
   
   Cosigning an apartment lease will help the account holder’s credit score and give a rental history that will allow them to lease an apartment on their own, later on as well as successfully apply for a home mortgage loan. 

7. Teach them the difference between a credit and a debit card
   One of the most important financial lessons that a young adult should learn is the difference between a credit card and a debit card. Here’s a look at the major differences that you can point out to your young adult:

• • Debit cards
    • Allow an account holder to draw from funds that they already have in their account
    • May only have a cashback rewards benefit
    • There is no credit report check when applying for a debit card
    • If a debit card is stolen, it may not protect against unauthorized use

• • Credit cards
    • Draw from money loaned to them by the credit card company
    • Will generally charge interest if a payment is not made within a given grace period
    • Some may offer rewards, including cashback, reward points, and other benefits
    • If a credit card is stolen, the account holder will generally be protected against unauthorized use
    • An account holder’s credit score will figure into the application process for a credit card
    • Credit cards have a limit set by the credit card company

What is a good credit score for a young adult?

Although ranges vary depending on the credit scoring model, generally credit scores from 670 to 739 are considered good. However, the higher the score the more likely a borrower is to obtain “prime” rates. The prime rate is the interest rate that commercial banks charge their most creditworthy customers. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate that banks use to lend to one another.

A credit score below 670 will usually require a cosigner for an apartment rental, car loan, or personal loan. 

Helping your adult child get great credit for their future purchases 

As you can see, there are many ways that you can help your young adult child establish good credit. Try one or more steps. You will be surprised how quickly you can get your adult child off on the right foot.