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Monitoring your child’s health and safety is part of being a parent. And because credit scores have such a big impact on our financial prospects, a lot of parents these days are also trying to help their children establish credit.
So how soon is too soon to start helping your child build credit? The answer might surprise you.
It’s never too early to start thinking about your child’s financial future. In today’s world, a good credit score is essential for securing loans, mortgages, and even employment. But how do you help your child build credit when they’re too young to have their own credit cards or loans?
The good news is that there are several ways to start building your child’s credit, even before they reach adulthood. This guide will explore the different options available the pros and cons of each, and how to choose the best approach for your family.
Let’s dive in!
Adding Your Child as an Authorized User
One of the simplest ways to help your child build credit is to add them as an authorized user to your credit card account This means that they will have access to the card and can make purchases, but you will ultimately be responsible for the payments.
Here are some of the benefits of adding your child as an authorized user:
- They will start building credit history immediately. As long as you use the card responsibly and make payments on time, your child’s credit score will benefit.
- They can learn responsible credit card usage. By observing your spending habits and participating in budgeting discussions, your child can develop healthy financial habits.
- They can avoid predatory lending. By establishing good credit early on, your child will be less likely to fall victim to high-interest loans and other predatory financial products.
However, there are also some potential drawbacks to consider:
- You are ultimately responsible for the debt. If your child makes irresponsible purchases, you will be on the hook for the payments.
- It can impact your credit utilization ratio. Adding another user to your account can increase your credit utilization ratio, which is the amount of credit you are using compared to your available credit. A high credit utilization ratio can negatively impact your credit score.
- It may not be appropriate for all children. Some children may not be mature enough to handle the responsibility of using a credit card.
If you decide to add your child as an authorized user it is important to set clear ground rules and monitor their spending closely. Talk to them about responsible credit card usage and the importance of making payments on time.
Opening a Secured Credit Card for Your Child
Another option is to open a secured credit card for your child. A secured credit card requires a security deposit, which typically equals the credit limit. This deposit serves as collateral in case your child fails to make payments.
Here are some of the benefits of secured credit cards:
- They are a good way for children to build credit without the risk of going into debt. Since the credit limit is limited by the security deposit, your child cannot spend more than they can afford to repay.
- They can help children learn how to manage credit responsibly. Secured credit cards often come with lower credit limits and higher interest rates than traditional credit cards, which can encourage responsible spending habits.
- They can be converted to unsecured cards. Once your child has established a good credit history with the secured card, they may be eligible to have it converted to an unsecured card.
However, there are also some drawbacks to consider:
- They require a security deposit. This can be a barrier for families who do not have the extra funds available.
- They may have higher interest rates and fees. Secured credit cards often have higher interest rates and fees than traditional credit cards.
If you decide to open a secured credit card for your child, it is important to compare different options and choose a card with low fees and a reasonable interest rate. You should also monitor your child’s spending and help them make payments on time.
Becoming a Cosigner on a Loan
Another way to help your child build credit is to cosign on a loan with them. This means that you agree to be responsible for the debt if your child defaults on the loan.
Here are some of the benefits of cosigning on a loan:
- It can help your child qualify for a loan they wouldn’t otherwise be able to get. Cosigning can improve your child’s chances of getting approved for a loan, especially if they have limited credit history.
- It can help your child get a lower interest rate. Cosigning can help your child qualify for a lower interest rate on their loan, which can save them money in the long run.
However, there are also some significant risks to consider:
- You are ultimately responsible for the debt. If your child defaults on the loan, you will be on the hook for the payments. This could damage your credit score and make it difficult for you to qualify for loans in the future.
- It can strain your relationship with your child. Cosigning on a loan can create tension and resentment if your child fails to meet their financial obligations.
If you decide to cosign on a loan with your child, it is important to have a clear understanding of the terms of the loan and the potential risks involved. You should also make sure that your child is committed to making their payments on time.
Other Ways to Build Your Child’s Credit
In addition to the options mentioned above, there are a few other things you can do to help your child build credit:
- Help them open a savings account. A savings account can help your child learn how to save money and manage their finances responsibly.
- Encourage them to get a part-time job. Earning their own money can help your child develop a sense of financial responsibility and learn how to budget.
- Teach them about credit and debt. Talk to your child about the importance of using credit responsibly and avoiding debt.
By taking these steps, you can help your child build a strong credit foundation that will benefit them for years to come.
Building credit is an important part of financial literacy. By starting early and taking the right steps, you can help your child establish a good credit score that will open doors to financial opportunities in the future.
Remember, there is no one-size-fits-all approach to building credit. The best option for your child will depend on their individual circumstances and financial goals.
Starting with education is best
Whatever method you decide to use to assist your child in establishing credit, if you decide to do so at all, research indicates that teaching children about money will eventually result in better credit scores.
It’s important to review the variables that affect credit scores so that you can teach your child responsible credit practices.
There are many approaches to begin teaching your children, but the majority of experts concur that it’s beneficial to start teaching them the fundamentals of earning, saving, and spending before they reach adolescence. Preteens are an excellent age to begin introducing the concept of credit because they are likely to understand the idea of borrowing and repaying debts. Additionally, make sure your child understands how to use a credit card responsibly before letting them use one.
You can start building your child’s credit today
By designating your child as an authorized user on your credit card, you can start establishing their credit whenever you’d like. Typically, obtaining a credit card or loan requires you to be at least eighteen and to be employed. These are the traditional means by which individuals begin establishing credit. But authorized usership is a little different. Since they aren’t in charge of any of the bills, issuers frequently don’t set an age minimum for authorized users.
Authorized user status allows your child to benefit from your good credit history. Although it’s not as effective at establishing credit as being the account’s primary user, it’s still a start.
Until you believe your child is ready for the responsibility, you don’t even need to give them a card—just having them listed as the authorized user on paper will suffice.
When your child is growing into a financial adult, there are additional ways to support them that will also be more effective than authorized usership. For instance, you could co-sign your child’s first credit card if you have the financial means to do so. If your child is a full-time college student at the age of 18, this may be a necessity. If your child is fully employed in the workforce, this may not be required. You could also co-sign a car loan or student loan for your child.
Your child’s credit score will increase if you co-sign a loan or credit card on which they are the primary borrower, but there are risks involved. If your child doesn’t, you will be liable for the cost, so before proceeding, make sure you are comfortable with this possibility.
Your adult child can establish credit through other means if you have experienced credit setbacks or have limited credit experience yourself. These other methods include:
Can You Build Your Baby’s Credit?
FAQ
At what age can you start building your child’s credit?
Can I add my child to my credit to build their credit?
Can I open a credit card in my child’s name?
How can I build my child’s credit?
You can begin building your child’s credit whenever you want to by making him or her an authorized user on your credit card. Usually, you have to be at least 18 and have an income to take on a credit card or loan, which are the conventional ways that people start building credit. But authorized usership is a little different.
Can a child build credit with a credit card?
1. Start early If your child is already a young adult who is ready to start building credit with a credit card, there are a few simple tricks you can teach them about maintaining excellent credit: always pay your bill on time, spend below your means and don’t open more accounts than you can comfortably manage.
Does my child have to be 18 to start building credit?
Building credit for your child will help them establish a positive credit history and empower them to borrow for big purchases later in life. The good news is your child doesn’t have to be 18 to start building credit. Get on the path to establishing credit for your child and help them secure a strong financial future.
Can a Credit Builder loan help my child establish credit?
Here’s how these loans could help your child establish credit. Your child applies for a credit builder loan with a local credit union, community bank or online lender. If approved, the loan amount is held by the lender in an interest-bearing savings account. Your child makes payments to the lender for a short period of time (usually 12-24 months).