My daughter is starting college. Is a secured credit card recommended?
A secured credit card can be a great way for someone to begin building credit. This is especially true for a young college student who does not yet have sufficient credit history or income to qualify for a traditional card on their own.
What is a Secured Credit Card?
With a secured credit card, you deposit a certain amount of funds into a savings account, and in return you receive a credit card with a credit limit that is typically a percentage of the amount you deposited. Any charges on the account is are "secured" by the money in that account, so it's easier to qualify.
If payments are not made on time, the bank will withdraw funds from the savings account but will report the payments as late in the credit history.
If your daughter opens a secured account, make sure she understands how to use it responsibly, keeping the balance low and making all payments on time. Ideally, she should pay the balance in full each month to avoid interest charges. After some time, the lender may convert the account over to a traditional credit card.
Ways to Build Credit
There is more than one way to begin establishing credit history. Aside from opening a secured credit card account, your daughter can also consider:
Becoming an authorized user.
An authorized user on a credit card can use the account to make purchases, but they are not responsible for making the payments. Not all credit card companies report authorized user accounts to Experian, but many do. Adding your daughter to one of your credit card accounts as an authorized user can help her learn to use a credit card responsibly while beginning to establish her credit history.
Asking a parent or family member to cosign for an account.
Your daughter will likely need a cosigner to qualify for an installment loan or traditional credit card account. If she plans to use student loans to help finance her college education, cosigning for those loans can be a great way to help build her credit history. Make sure all parties understand that the loans will appear on both her credit history and her cosigner's, and any late or missed payments will negatively impact you both.
Building Credit History Early
If she hasn't already done so, the first thing your daughter should do is request her annual free credit report from each of the three credit reporting agencies. She can also check her Experian credit report for free at any time.
Establishing credit early and making it a habit to check her credit reports regularly will be a huge benefit to your daughter when it comes time to rent her first apartment, buy her first car, or even apply for car insurance and utilities.
The stronger her credit history, the more likely she will be to qualify for the best rates and terms available. That means spending less of her hard-earned money on deposits, interest rates, and premiums, putting her in a better financial position for her future.
Thanks for asking,
Jennifer White, Consumer Education Specialist
This question came from a recent Periscope session we hosted.