There are many ways for a child or young adult to build a good credit history. The stronger their credit history, the easier it will be for them to buy large ticket items like a house or a car when they’re older. Some employers look at credit scores as well, so it can have an impact on their future. When building credit, many turn to revolving credit. There are some benefits, and some cautions, to using revolving credit.
What Is Revolving Credit?
Put simply, revolving credit occurs when you borrow money from a creditor up to a predetermined limit. The amount you borrow is subtracted from your limit. And every time you pay off your balance, your limit goes back up.
Credit cards are the easiest example of revolving credit. You apply for a credit card or receive a preapproved offer in the mail. You have $10,000 in credit. You run out and buy a $1000 big screen television which means you now have $9000 in credit. You pay the $1000 back and you have $10,000 again.
The issue with revolving credit is that you’ll pay interest on that $1000 that you borrowed. So in fact, you aren’t paying back $1000 for that television but more - much more in some cases depending on your interest rate. And if you’re unable to pay that $1000 back within the month, then your interest will continue compounding. $1000 can turn into $1500, $2000, and more depending on how you’re able to pay your credit card debt.
The easiest solution to this is to never borrow more than you can pay off right away. And this is where revolving credit can be useful to build a strong credit history.
Using Revolving Credit to Build a Credit History
One of the biggest reasons for a young adult to have a revolving credit account, or a credit card, is to help teach them about making smart buying decisions. It’s quite easy to be tempted to spend the full credit limit, whether it’s $1000 or $10,000, as it often feels like “extra money.” Starting to build smart credit habits early can help a child build lasting habits.
Additionally, when a parent and a young adult work together to control and plan credit card spending, a child can begin to build a positive credit history. One approach might be for the child to spend $100 a month on their credit card and to pay it off every month. They’ll need a job or some sort of income to ensure they’re able to make that monthly payment.
A history of timely payments and use of their revolving credit account demonstrates to future creditors that they’re a responsible person. They’ll earn better interest rates and good habits along the way.