Happy Day to you. This is Ken Kaufman and I am thrilled you’re here for episode number 18: Kids and Credit Cards. Building on the last episode about kids and credit scores, I want to jump right back into the story of my 20 year old son; he’s 20 this month. I explained how I started to wonder how I could possibly help him, or encourage him to build up a credit score while he was gone. And he’s still serving a mission for the Church of Jesus Christ of Latter Day Saints. It’s a two year commitment, and he’ll be home in a few months.
Here’s what we’ve done and the results of some research and some trial and error in the process. And I want to pass along the key lessons learned. So as I did research on this subject, I realized that I missed a critical deadline is in his life. It was the day he turned 18. Now I was there and celebrated it, but I mean I missed an event that should have happened that day. He became an adult that day. And he could officially, legally own his own financial accounts and apply for his own credit card. Or he could also apply for debt if you wanted, but it would have been impossible in his situation, but he could apply for a credit card. That’s the day I should have had him apply for a credit card. We missed it by a little more than six months or so. But I think we’ve made up for it and glad for some of the learning and also really happy to pass it along. So at this point in time, he turned 18, left on his mission–he had no credit score, no credit activity ever posted to his social security number or his profile, he really from a credit perspective didn’t exist on the grid.
So this created a challenge for us. How do we apply for a credit card if he doesn’t have any credit? and we found the solution: it was to actually get a secured credit card. And let me explain how that works or what that means. It’s easier for me to talk about an unsecured credit card first, because that’s what all of us are probably the most familiar with.
A credit card–most of them, generally speaking, they are unsecured. That means that the credit card issuer has no security interest in any of your assets. Credit card companies take the risk that they’re going to be able to collect without having direct access to these assets. Now a good example of a secure debt: the opposite of that is a mortgage. Certainly the mortgage lender loans you the money so that you can buy a house, but they also take a security interest in that house, (first position in that house.) And should you default on payments, they could foreclose and take that asset away from you. That is a secured debt. Most of the time, credit cards are unsecured debt, meaning the credit card issuer does not have direct access to or a lien or security interest against any of your particular assets. They have a general interest that allows them to pursue and to try to collect money if you default, but they do not have a secured interest. So a secured credit card means you give them direct access to assets so that if you should default or miss payments, they can access those assets to in essence repay themselves. So now that you understand sort of this concept between secured versus unsecured, how it works. A secured credit card requires you to make a deposit of money to the credit card company before you even charge anything; you’re then allowed to spend up to that amount on your credit card. And if you fail to pay anything back to the credit card, they’ll simply take it right out of the deposit money that you sent them and pay themselves back. If you do pay it back and you earn the trust of the credit card issuer, then at some point they possibly would consider giving you the deposit back and switching your financial relationship and arrangement from a secured to an unsecured relationship.
So after doing this research on secured credit card options, we really found what we felt like was the best one, which was the Discover IT secured card. So that’s the Discover brand of credit cards with “IT” after it. You could actually do a search for secured credit cards, and there’s lots of information research or if you search “Discover IT secured card” or just even “secured”, it takes you right to where you can look up and research and even apply. And I’m not paid for making any referrals or anything, I’m just passing along the experience we’ve had, which has actually been really good. They’ve done everything that they said they would do and fulfilled on all those commitments–first time through, very pleased. Some of the key reasons why we felt like this was the right card: first of all, they had a low minimum security deposit to get started, it was $200 was the lowest, you could do up to $2,500, and then that would be your spending limit. But there was no need for us to do that with this experiment we were doing: just trying to build up some credit history for my son so he could eventually get a credit score. So that low amount–that felt great, easy to make that deposit. And it felt like a very safe way to start out–and my son doesn’t have massive purchases, he could put some minimal purchases on the card and not exceed that $200 amount.
The second thing is is that this card has refundable deposit program: after eight months of the account being open, Discover promised or committed that they would review the account monthly to determine if they would pay the deposit back and convert the card from secured to unsecured. Well, he got the $200 back right after the first review. So it was just shortly after eight months in–was really pleased, felt like they kept their commitment in that regard. And then what was even more amazing: so we had a $200 credit limit with his security deposit given back, but then they increased, a month later, his credit limit to $1800.So that was really great progress after just eight months of making a few purchases a month on and paying off the balance on the card.
Another key thing that stood out was no annual fee. Look, this is a starter card. The last thing that my son needs is to have some charts showing up every year on his card, he doesn’t know what it is, it’s just not appropriate at all in this circumstance (in my opinion.) Also, all the activity on the card would be reported to the three credit bureaus it’s right in all the details of when you sign up for the card. But they are very clear. People who get this card are trying to build up credit or rebuild credit if they’ve had some issues in the past. And so they do all the reporting to the credit bureaus, and it allows for this credit history to build up. And they said that it takes six to 12 months or so. And within that period of time, if you didn’t have a credit score, depending on how you use the card, you could potentially get a credit score. And it turns out that right around month nine or 10, my son had his first FICO credit score.
The interest rate in this case, by the way, wasn’t super important to us. I mean, I knew it would be high as a secured credit card taking on people who either have no credit or very bad credit, I knew that the rate would be high: it’s 24%. But we knew we weren’t ever going to incur interest. And so we weren’t worried about that knowing this was just our starter place, and then obviously with such a low spending limit, very little at risk in terms of having to pay interest, even if we missed a payment. Just a nice perk that came along with it as it does do cash back. It acts like one of Discover’s other credit cards, where it does 2% back I think on gas and restaurant purchases, which we never did those anyway. And then 1% cash back on everything else. I like this, not because obviously we’re making a lot of money on say $100 of purchases a month, but it allowed my son to see the benefits and the rewards of if you use a credit card responsibly, you can earn these rewards just by being responsible, paying your balance off, not incurring any interest; you kind of play the game, to where the credit card company isn’t making all that money off of you, but you are still earning all of those rewards.
And then the other nice thing is, once you do have a FICO score, (their website has it available,) you can look at it and see what causes it to go up and down. And it’s just a good educational tool, as well as see what’s happening with your credit score on a regular basis. A couple of other features that I thought were great, (but they weren’t, you know, deal breakers on it by any stretch) was, (and most other credit cards allow you to do this, in fact, I think all of them do.) But we could connect his bank account right to the card, we could then set up auto pay that authorized that the full balance would be paid before the end of each grace period, before any late payment penalties or interest was incurred or any of those kinds of things. It’s just a nice safety net to have out there. Because I encouraged my son–we pay the balance off the day before the statement cycle ends, which we’ve executed on well, but it’s just a nice safety net to put out there just in case something got missed in the process. And then we just found the online access with Discover in general; I’d never done business with them before, never had a Discover card and found a really nice online, intuitive website, easy to understand, easy to follow. So with the card in hand, he in essence found a recurring bill that he could put on that card every month. So we were guaranteed to have some activity every month, and then he had the ability to do a few incidental purchases each month if he desired. So as you recall, I started this whole process. And my son’s been a great, he’s been great to be a guinea pig, as we’ve sort of learned and figured our way through it. And he’s also gotten some significant benefit out of it as well.
But I started this wanting to teach my children how to earn their own credit score, and how to learn to use a credit card responsibly. So besides just teaching them verbally, I wanted them to get hands on in this experience, and actually I think it worked really well. So after a little more than a year, he’s got his $200 deposit back, he has a credit limit of $1800 (starting from, again, no credit score.) And he has a FICO score of 759 as of the recording of this podcast. So that score is then on credit data. And he doesn’t have different types of credit, and there’s lots of reasons why that’s pretty thin and weak. But it’s still a very good score as of right now, and he has the ability to continue to build on that.
So the key conclusions and takeaways here, and some of my key recommendations: first one is start teaching your kids all about credit right now, how it works, when they should pay it off, all the nuances, mechanics, and ins and outs. On your child’s 18th birthday, find the best secured credit card that reports to the agencies and get them signed up. If you don’t want to do the research, use the Discover IT program–I hope you have the same experience, that Discover IT secured card program. Hopefully you have the same experience that we did, it’s been really good and no complaints. And they’ve done everything they said they were going to do. Also be patient let the process work. So just do a little bit, few charges, less than $100 or $150, you gotta stay below that 200 limit. So just stay disciplined and patient and wait it out and–the process works. And soon enough, your child’s gonna have a credit credit score, and be learning some key, critical lessons in the process. So there it is, Kids and Credit Cards, how to get them their first card, which ultimately will get them their first credit score. So make sure to subscribe to the podcast so that you don’t miss future episodes.
Many, many thanks to you for joining today. This is a wrap for Episode 18. Happy day.
Transcribed by https://otter.ai and Miss Ashley, the best paid and best loved employee of Kaufman Family Inc.