First Federal Bank Blog

Helping Young Adults Build Credit

Written by First Federal Bank | Sep 30, 2024 2:00:00 PM

One thing financial experts agree on is it is essential parents begin talking about finances with children from a very young age. And it should not be a one-time conversation. As they grow, you can tackle more complex topics and help build on their knowledge. But what about once they have become adults?

There are still ways you can help them learn healthy financial habits. Forbes advisor Lee Hallman discusses how to help young adults build good credit and avoid debt traps:

Discuss Card Options

Choosing a credit card isn’t a one-size-fits-all deal. The market is flooded with offers of all kinds, and I knew choosing the right one would be critical in setting him up for success. 

One of the first things we did was take a look at the interest rates. After explaining the concept, we both agreed that looking for the lowest interest rate would be helpful in avoiding steep charges if there was a slip-up and he couldn’t pay off his balance in full each month.

Keeping things simple for him was a must, so we kept our eyes out for cards with no annual fees and low credit limits to help prevent any debt from spiraling into something unmanageable…

Set Spending Limits

Putting spending limits in place isn’t about restricting freedom. It’s about instilling the value of using credit responsibly. We made it a collaborative effort, discussing what would be a reasonable monthly cap based on his income and needs. This way, he learned to navigate the credit world with a safety net, preventing any financial problems in the future.

This process opened up valuable conversations about budgeting and financial goals. It wasn’t just about the numbers on the credit statement—it was about aligning spending with his priorities. This simple step of setting limits became a gateway to helping him understand the bigger picture of financial responsibility. 

Avoid Debt Pitfalls

As a parent, I wanted to make sure my son avoided any missteps when getting his first credit card, so we discussed how it’s vital to pay off the card every month. In my experience, this approach gives peace of mind knowing no balances are accruing interest. More importantly to me, it helped him establish responsible credit usage right from the start. By making full payments, he dodged unnecessary interest charges while building a solid history.

Another tip I shared was to understand his limit and stay well below it. We talked about credit utilization and how keeping his usage below 30% of his total limit was crucial to maintaining healthy credit. It’s a simple way to avoid overextending.

I also advised using the card as a buffer for surprises. A credit card adds a layer of protection when life happens. This led us to discuss having an emergency fund, and the goal of having both a credit card and cash reserves ready for unexpected expenses.

Monitor Statements Regularly 

For me, monitoring statements goes beyond just making sure the numbers add up. It’s about understanding spending patterns, catching anything out of the ordinary and keeping my financial ship sailing smoothly.

Regularly reviewing statements gives us a moment to reflect on where money is going and whether it aligns with his priorities. My son and I now have a routine of sitting down together and looking over his monthly statements. It’s our financial checkup and a chance to review each transaction, confirm due dates and look for unauthorized charges.

Statements can easily fade into the background. That’s why it’s become an important habit I wanted my son to learn. He now sees each one as a regular checkpoint to stay in control and prevent any surprises.

 You can read the full article here.

How involved you will be in your adult child’s finances will depend on the situation and both your and their comfort levels. Hopefully, you have established yourself as a trusted advisor from the very beginning, and their transition to financial independence will be a smooth one.