How to Help Your Child Build Their Financial Future
A Guide to Set your Children Up for Financial Success
Having an excellent credit rating will make getting a mortgage, car loan or credit card much easier. Better interest rates are available to those with good credit, so it is important to improve your credit before applying to lenders.
It can be particularly difficult for first-time buyers to get a mortgage when they don't have a great credit history. Many young people will assume that they have good credit, only to be sorely surprised when they try to take out a loan. As a parent, there are some things you can do to help your child improve their financial future so that they won't find themselves in this difficult situation.
Learning the Value of Money
If you can teach your child the value of money by giving them some responsibility over their spending, this will create good habits. They have to understand what a dollar is worth by using their own money to buy things they want. This will lead them to learn that if they want something expensive they will have to save up for it. They will understand what it is like to want something but not have the money to pay for it.
This should show them that what they do with their money has consequences. It will give them a good foundation for making better financial decisions when they are adults.
To aid in learning this responsibility, it is better to pay your child to do jobs around the house, rather than just hand them an allowance each week. This will show them that putting in some work will lead to them getting things they want.
Open a Savings Account
A first step into the financial world is a savings account. Getting your child signed up with an account will allow them to save their earnings from odd jobs and help them to understand saving. They will be happy when their savings grow and disappointed when they spend on something which wasn't worth it.
This will give them an understanding of delayed gratification and show them the benefits of interest on what they've saved. When they are a little older, they can open a checking account. This will have more responsibilities, including becoming overdrawn and the penalties that come with it.
Adding Them to Your Credit Card
If you have a good credit history yourself, adding your child to your account as an authorized user can really boost their credit rating. This will give them a card in their name which is linked to your account. This account will add to both you and your child's credit report.
They will be able to make purchases on the card, with the primary cardholder, you, ultimately responsible for making payments. You will need to make sure they understand that they can't go crazy with the card and it will need to be paid off every month. You should set some rules for the use of the card and monitor the spending on it.
If you don't feel that they are responsible enough, you could add them as an authorized user without letting them have a card. This will improve their credit history without any danger of things going wrong.
Applying for a Credit Card
If your child has some responsible financial habits, there is a student credit card available. This does have lower credit limits than normal cards and higher interest rates too.
They will need to show that they have the ability to repay the credit line offered, and this will mean a part-time job. If they don't have a job, you could co-sign for them. Though doing this could potentially harm your credit rating if they don't make payments on time.
If that isn't appropriate for your child, there is the option of the secured card. This is a financial product that requires a deposit of several hundred dollars to open. This deposit will set the limit on the card, and since this is a low-risk situation for the lender, they will offer it to most people.
If your child is responsible with the secured card, they should be able to qualify for an unsecured card down the line. As long as they use the card and are consistent in paying off the balance, they should be able to get a card with lower charges than those that come with the secured card.
These fairly simple tips can serve your child well as they grow up. Allowing them to have a better relationship with money and a more secure future. Many of life's problems are money related, so a better understanding of the value of money, as well as credit, will pay dividends.
While I was taught the value of a dollar growing up I was never taught about credit, so I assumed no credit would be considered good, which if you ever try obtaining a loan it's not. One of my goals as a parent was to help my children build excellent credit before graduation, which I have successfully done with my oldest son and the other is following in his footsteps. Building excellent credit is a lot easier than trying to improve bad credit.