I thought I’d share with you one of the things I remember hearing from a banker years ago that changed how we prepared our four kids for college. Yes, just another reason you should read our newsletter!
When the first of our four children were getting ready to head off to college, a friend of mine from the bank said, “Let me give you some financial advice that will help set your kids up for when they’re out of college. Add them to your credit card rather than having them get their own.” Before you say I would never do that, I recommend you keep reading.
We all know that credit scores are essential in life, and ensuring our kids have adequate credit scores after they graduate is necessary. So not only will I share with you how it works, but I’ll also share how it made a difference for our four children in the future.
How it protected our kids at college
If you attended college, then you know credit card companies solicit students. The push for them to establish a credit card will be around every corner, giving them access to funds they’re not used to being responsible for. This can cause unwanted credit scores if their charges aren’t paid back correctly.
One of the negative parts of college students getting these “college starter” credit cards is the much higher interest rates, coupled with the low spending limits based on being a starter card. It doesn’t do a lot to help them when you get out of college, either, even if they paid it back perfectly. A spending limit of $2500 is so low it doesn’t really help them get a car or make any other major purchase.
So the advice I got from the banker was to add them to our card, which added a much higher credit limit and also let them “borrow” from our long credit history. Remember that this is only good for your kids if you’re good at paying your payments on time.
So what’s the benefit of connecting them with you? First, your payment history will affect their growing credit score once you’ve added them to your card. Second, it ensures your kids become accountable for what they need to purchase at college. Third, it gives them access to funds via credit card in case there’s an emergency, and they can’t reach you.
In our family, we had established a budget, and if they needed to use our credit card, they had to get our advance permission. Since the credit card already had a long history, there was no need to go out and charge things on the card to develop a credit history, which, as you know, leads to unnecessary purchases.
How it worked when purchasing a car after college
The time was perfect for my second son, who had just graduated, as the government announced a program called “Cash for Clunkers.” He wanted to get rid of his current vehicle because it perfectly fits the “clunker” description. For years he had an old Ford Explorer and wanted to replace it with a new car, under warranty, and with better fuel economy. He wanted to get back and forth to work without issues, and we both agreed that the timing was right and that this made sense. He needed a vehicle with better gas mileage. He had been driving a $5,000 car that we purchased six years prior, and now the government was offering him $4500 so that they could destroy it.
What does this have to do with credit cards?
Now that you know the background story and why I thought it was an excellent idea for my son to purchase a new car, off to the dealership we went. After my son agreed on a price for a Mazda 3, the finance manager asked if I would be co-signing with my son on his new car loan.
I said, “Hold on a minute. Let’s see if he needs one first.” Here’s the response I got from the finance manager – “Typically, even if your child has a credit card or cards and has some credit history, it’s usually not enough to qualify for a car loan on their own.”
Because I once had that role while working at a car dealership, I knew this to be true and had to tell other parents the same thing when I sold cars. But in this case, I was hoping the advice my friendly banker had shared with me four years earlier might change the need to co-sign on my son’s new vehicle for the next four years.
So my son filled out the application, and to the finance manager’s surprise, his loan was instantly approved. He then asked me how my son got approved for a credit card with such a high limit. I told him the story my banker friend had shared and how he said it would work, and now it had.
His response came in two parts. The first was that it had been brilliant advice, and the second was that he wished someone had shared it with him so he could have done it for his daughters.
As far as my other kids go, when they all went on to make a car purchase or rented apartments or made their first home purchase, they could get everything on their own with no co-signers needed. And in every case, the people they came in contact with were shocked at their credit score and credit history.
We removed each kid from the card after college because they no longer needed our credit history.