It’s unfortunate that high school seniors aren’t required to take a personal finance course before they graduate. Instead, many of them are sent off to a brand new campus with little knowledge of how to create and balance a budget, build credit, and why they should avoid using credit cards for now.
Even though they may have a job ready and waiting, there are expenses their first few paychecks may not be able to cover. A survey from The National Association of College Stores (NACS) reports that course materials alone cost almost $600 for the 2016-2017 academic year. Add to that any moving expenses, normal household items like chairs, plates, silverware and bed sheets, plus a stocked refrigerator, and a bank account can be drained the first week.
There are many ways a young adult can get money, but some of them spell potential financial trouble. As a parent you can guide your child in the right direction. Help them choose avenues that are low-risk, easy to obtain, and can help them begin to build their credit. Here are three you should look into:
Secured credit card. A secured credit card is nothing like traditional credit cards that come with promises of 0% APRs (but hit you with high interest rates if you don’t pay off the balance every month). Plus, if a student doesn’t have credit built up yet, the only option is a high interest credit card.
A secured credit card requires the borrower to deposit their own (or their parents’) money. So, the credit limit on the card is equal to the amount deposited. If a payment is late or missed, the bank makes the payment from the deposit the card holder used as initial collateral to open the account. Not only does a secured credit card teach young people about responsible spending if used correctly, it’s an excellent way to begin building credit.
Short-term personal loan. This type of loan has grown in popularity over the last decade, because these loans are unsecured, which means they don’t require a credit check. Personal loans are approved based on having regular income and an active bank account.
Many people make the wrong assumption that these types of loans come with heavy up front fees and high interest rates. By taking the time to shop around, it’s fairly easy to find companies that don’t charge origination fees or even prepayment penalties. Online personal loan companies make it even easier, by matching borrowers with lenders that are much more lenient than traditional loan providers.
Short-term personal loans help teach budgeting, build credit, and are easier for those with little or no credit to get approved for. Plus, the interest rates on these types of loans are usually a lot less than any credit card a student would qualify for.
Credit-builder loan. This loan does exactly what it’s name says -- helps build credit. This type of loan is not for the student who needs money right away. It’s ideal for someone looking to build credit while also creating a savings account of sorts.
Credit-builder loans are typically available through your local credit union. The amount of money you are approved for is kept in the account. The borrower makes payments, and once the amount of the loan is “paid in full” the money is released. On-time payments are reported to the credit bureaus. At the end of the term the borrow has begun establishing a positive credit history, and has the bonus of access to a lump sum of money.
As a parent, professor, and financial consultant I believe it's important to tech young adults not only financial responsibility, but how to navigate the world of credit. I hope this helps you set your child on the right path.