FINANCES – November 2012

High School Grads Need to Understand Credit

If you’ve got a recent high school graduate who’s getting ready to head off to college or join the workforce, let me share a few lessons I learned the hard way about managing personal finances that you can pass along to your kids.

Young adults are just starting to build their credit history. In the coming months they’ll probably encounter many unfamiliar expenses – and many financial temptations. If they’re not careful, a few ill-thought decisions made now could damage their credit for years to come.

Here are several actions your kids can take to build good financial habits and strong credit – and a few minefields to watch out for:

Probably the most fundamental tool to for young adults to help manage their finances is a basic checking account and debit card. A few tips to pass along:

• Look for a bank/credit union that charges no monthly usage fee, doesn’t require minimum balances and has conveniently located ATMs so you don’t rack up out-of-network ATM charges.
• Enter all transactions in the check register and review your account online regularly to know when deposits, checks, purchases and automatic payments have cleared.
• Don’t write checks or make debit card purchases unless the current balance will cover them – many transactions now clear instantaneously.
• Banks must ask whether you want overdraft protection. If you opt for coverage, understand that overdrafts can be expensive – up to $35 or more per transaction.
• Request text or email alerts when your balance drops below a certain level, checks or deposits clear, or payments are due.

Credit cards for young adults can be a useful tool, but they must be used responsibly. By law, people under 21 must have a parent or other responsible adult cosign credit card accounts unless they can prove sufficient income to repay the debt. If you allow your child to become an authorized user or joint account holder on one of your accounts, remember that any account activity, good or bad, goes on both your credit reports, so careful monitoring is critical.

Another way to build credit history is to start out with a “secured” credit card – a card linked to an account into which you deposit money. Typically you can charge up to the amount you’ve deposited and then replenish the account with more funds.

After they’ve made several on-time payments, have your kid ask the lender to convert it to an unsecured card, or to at least add an unsecured amount to the account. Just make sure that the lender agrees to report your payment history to at least one of the three credit bureaus; otherwise, the account does nothing to improve your credit.

If they qualify for an unsecured credit card, have your kids follow these guidelines:

• Always make at least the minimum payment – on time – each month.
• Strive to pay off the full balance each month; otherwise, the accumulated interest will add significantly to your repayment amount.
• Avoid using credit cards for cash advances, which often incur upfront fees and begin accruing interest immediately.
• Look for a card with no annual fee and also compare cash advance, late payment, balance transfer, over-the-limit and other fees.