You may be willing to give your child credit by making a loan. Loans to children from people they know are discussed Loaning Money to Your Child.
Financial Building Blocks
The three main credit reporting companies (called credit bureaus) are: Equifax (800-685-1111; www.equifax.com); Experian (800-687-7654; www.experian.com), and TransUnion (800-916-8800; www.transunion.com). For a small fee (about $8, depending on your state), your child can request a copy of her credit report from any of these companies to check the facts and take steps to clear up any problems. She can request her report online, by phone, or by mail, although all reports are sent by mail for security purposes. If she applies for a loan and is turned down because of her credit history, she's entitled to ask for a copy of the credit report for free. She has 60 days to act.
Once your child reaches legal age, however, he can go out into the real world and get credit from strangers, including credit card companies and other lenders. Good credit means that these strangers believe in your child's ability and promise to repay what's borrowed. It's a question of trustworthiness.
Loans are not based only on a promise; they're also based on past performance. Borrow a little, repay it, and voilà, you now a pattern of good repayment performance. This marks the start of a good credit history.
When your child applies for a credit card or a loan, the decision to give him what he asks for depends on his credit history. He won't find credit history in a civics text book—his credit history is maintained by credit bureaus that lenders and others can access (with your permission by applying for a loan) to find out about him.
Because your child is young, his credit history may be a blank page in creditors' files. He doesn't have any credit history because he hasn't borrowed before or paid a telephone bill.
Two ways exist by which to start up a credit history. The first is to apply for credit by filling in a credit card application. Your child may need to show a little initiative to convince the first credit card company to ante up. For example, when applying for a credit card, your child should attach a note to the application and be up front about the fact that he doesn't have any credit history (something it'll find out soon enough). Your child should explain that he can afford to pay his bills and should encourage the company to give him a chance. This approach has worked for everyone I know who's tried it. Or, your child can apply for credit at a department store near him, pay for purchases by store card, and pay his bill on time. Once he has some history under his belt, he can then apply for a bank credit card.
A guarantor is someone who promises to pay a loan if the borrower fails to do so. The guarantor is putting his credit history on the line.
If he's denied credit, it may not be because of a bad credit history or even no credit history. It may be because he has lived at a certain address or held a job for only a short time. Or, he may have been confused with another person with the same name. Again, he can usually overcome these deficiencies with a brief explanation of the situation.
For some loans, such as a bank loan for a car, your child's good word or even good credit history may not be enough. The lender may not think that his income is enough to repay the loan. However, the lender may be willing to give him the loan anyway if there is a guarantor, like you, who is able to stand behind him.
Keeping a Good Credit History
As your teenager probably knows, keeping a good driving record means lower insurance rates. The same holds true for borrowing: Keeping a good credit record can mean lower interest rates when borrowing.
Financial Building Blocks
How long do bill-paying mistakes haunt a person? That depends on how serious the error is. Most negative information in credit reports remains on file for seven years. Bankruptcy, just about the most serious financial mess possible, stays on a record for 10 years.
Once your child starts paying her own way, she won't want to mess up her credit. To maintain that good credit, she should follow these simple rules:
- Pay bills on time. Keep bills in a place where they won't be lost. Your child's best bet is to set up a place on a desk for incoming bills so that she won't forget to pay them. Bills should be mailed about five days before they're due so that they'll be received on time—and don't forget the stamp.
- Don't take on more than what's manageable. Your child should cut expenses to reduce monthly outlays. Of course, this is easier said than done, but doing so will save headaches in the future (this situation is explained later in Teach Kids About Buying on Credit.)