Teach Teenagers Credit History

Allowing your child graduate without a credit history has its own drawbacks. There are implications for life being more expensive if you get out of college and haven't established any credit. Lack of a credit history may make it more difficult to rent an apartment, for example, or more expensive to get a car loan or car insurance. Fortunately, there are ways to help your child start building a credit history without falling into debt.

Debit-Card Test Drives - It's easy for college students to obtain credit cards, but that will soon change. A new law will force many students to rely on their parents' help to get credit cards. And that gives parents an opportunity to insist that their children first learn to charge responsibly with a debit card.

A law that restricts banks' ability to issue credit cards to anyone under the age of 21 takes effect in February 2010. Students who can demonstrate independent means of repaying their debts will be allowed to obtain credit cards, but the easiest way for most students to get a card under the new law will be to ask a parent to co-sign.

Children as Authorized Users - co-signing a child's credit card, even after a training run with a debit card, entails a certain amount of risk for parents. It makes them equally liable for the payment and debt of the child. Delinquent payments become part of the co-signer's credit history and the credit-card company can go after the co-signer for repayment of the debt.

If putting yourself on the hook for your child's spending makes you uncomfortable, you can take a safer approach by making your child an authorized user of one or more of your credit cards. This way, the payment history of the card will appear on the child's credit file and help him or her build a good credit history–assuming, of course, that the parent handles the card responsibly.

Parents will still be liable for any debts the child racks up, but that's easily avoided by not giving your kid a copy of the card. The authorized-user relationship is a very good option because you're still building your child's score and there's a brick wall between the parent and authorized user" as long as the child doesn't actually use the card, he says.

Secured Credit Cards - If you think your child is ready to take on more credit responsibility, but you still don't want to co-sign, consider a secured credit card. Unlike a regular credit card, a secured one requires the consumer to make a deposit with the issuer; that amount then represents the card's credit limit. This deposit should be ample proof that the cardholder can repay any debt incurred on the card, so college students should have no problem getting secured cards under the new law.

Other than the deposit, a secured credit card is no different from a regular one: The holder receives a bill each month with the option to pay any amount between the minimum payment and the full balance, and activity is reported to the credit bureaus the same way activity in an unsecured account is reported.

Some secured cards even pay interest on the deposit, so students can use them as a sort of savings account. You could start with a credit line of, say, $300, and over two or three years build it up to $1,000. A deposit of that size would be a nice chunk of change to get back when your child graduates to a regular credit card upon turning 21.

On the flip side, secured cards can be expensive: most charge annual fees, some have account setup fees, and some offer no grace period, which means your purchases start accruing interest immediately. Students can comparison-shop these terms through credit card web sites.