Giving your college kids an allowance? Make sure they're using some of it to build credit


By Catherine Alford

Giving college students an allowance can be a great way to ensure they learn how to budget and use funds wisely.

In fact, my parents gave me $100/month when I was in college on an automatically reloaded debit card, and this was supposed to cover anything extra, like clothing or getting a manicure. That way, I had to decide between life’s little extras and couldn’t just swipe my parent’s card to get whatever I wanted.

Although that was a great experience for me to learn how to watch my spending, a skill I carry with me to this day, I suggest adding another element of financial education for today’s parents of college students. This includes teaching your college students how to establish their credit and set their expecations about how long it takes to build credit. After all, according to joint research by professors at three different universities, “parents play a key role in their children’s financial socialization.”

So, here are some ways you can help your college students to build credit in a responsible way:

Encourage them to Get a Credit Builder Loan

Your college student doesn’t need to get a credit card to build credit. Instead, you can tell them about something called a credit builder loan.

This is a unique concept where the borrower and the lender agree on a certain amount and term length for the loan. However, instead of getting the money right away, the borrower makes small payments over time. Once the loan is paid off in full, the borrower will get the money back. Every month that they pay on time, the lender will report it to the credit bureaus, helping to improve your child’s credit over time.

This will allow them to save money while building credit and develop financial management skills. As an added bonus, at the end of their credit builder loan term, they will have enough in savings that you won't need to give them an allowance.

Advocate for a Secured Card

A secured credit card is a little bit of a mixture of the two ideas above. You have to put down a deposit, usually equal to the amount of your credit limit. If you’re late on a payment or don’t make one at all, your lender can take the deposit. This type of card is specifically for those who are looking to build or repair credit.

Keep in mind that in order for your college student to get their first credit card on their own they have to be at least 18 in most states and be able to prove income or assets. They can become an authorized user on a parent’s credit card if they are under 18 though. See our full guide to getting credit when you're 18.

As a parent, you can help your college student learn to manage money and build credit at the same time using this method. You can pay for the deposit, giving your child the ability to have the card on their own and then have them pay it off each month on time whether through money they make in side jobs or a specified allowance that you give them.

This teaches them that they have to make credit card payments, which is a step up from simply having them as an authorized user on your card where you make the payments.

A secured credit card in combination with a credit builder loan is a great affordable way for them to build credit history using two less-risky credit lines (since there's no way for them to run up an unmanageable credit card bill). 

Co-Sign a Credit Card

There are certainly pros and cons to co-signing any type of loan as the co-signer will always be responsible for the debt legally. However, this is also a good way to extend some of your credit history to your children. My credit report actually shows my name on a 30-year-old Exxon credit card account that belongs to my dad (and I’m not even 30 yet.) I don’t have it in my wallet anymore since I’m financially independent, but it’s on my credit report.

Remember that a credit card can essentially act as an “allowance” if you teach your children to track their spending to make sure they don’t go over a pre-set limit.

Ultimately, there are many options when it comes to teaching your college student about managing money and building credit. You just have to take the time to research and find the option that works best for your family.

About the Author

Catherine Alford is a personal finance writer, whose work has appeared in U.S. News and World Report and Business Insider, among others.

Written on March 15, 2016

Self is a venture-backed startup that helps people build credit and savings.
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