How To Establish Credit For Your Child
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.
How Do I Add My Child As An Authorized User
Adding your child as an authorized user is the same as for anyone else. Every bank requires different information when adding an authorized user to credit cards. Be ready with the following information about your child in case your bank asks:
- Full name
- Relationship to the primary cardholder
- Mailing address
- Citizenship
Bank Account/debit Cards Help Children Learn Financial Responsibility
Children that have a bank account can learn how to save and make money. Instead of their money simply sitting around the house, theyll be able to earn money off their savings.
This helps them learn how interest works and how nice it is to make money. Its always good to instill a good work ethic when you can.
Younger children can learn how to use a debit card with supervision. Older ones can have their own debit card, and enjoy being able to use it for things like online shopping, etc.
This gives them the independence that teenagers need while simultaneously helping them learn how to manage money.
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When Should My Child Get A Credit Card
If you think credit cards and childhood don’t mix, you’re not alone: Only about 10% of parents let their kids have a credit card, according to T. Rowe Price’s latest annual survey. However, adding your child to your credit card account can help foster an understanding of finances and debt that could prepare them well for their financial future.
Kids can’t open their own credit card account until they turn 18, and will need to prove independent income until they’re 21. But even before then, minors can benefit from becoming on a family member’s credit account. The right age to add your child as an authorized user depends on the reasons for doing so and whether your child is ready to manage the responsibility.
Starting With Education Is Best
No matter how you choose to help your child start building credit if you choose to at all theres evidence to suggest that educating kids about money will pay off in higher credit scores later.
It’s worth brushing up on the factors that affect credit scores so that you are able to explain good credit habits to your child.
There are a lot of ways to start educating your kids, but most experts agree it’s helpful to explain the basics of earning, saving and spending before your children become teenagers. Preteens are likely to understand the concept of borrowing and repaying debts, so that’s a good age to start explaining the concept of credit. And before you turn your child loose with a credit card, be clear about how to use it responsibly.
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Dispute The Fraudulent Account
A victim of identity theft should dispute with credit bureaus any fraudulent accounts that the thief has opened in your name. Providing documentation that the account was opened when you were a minor could help dispute the account.
However, merely establishing that you were a minor when the account was opened does not prove the invalidity of the account, says Rod Griffin, Experians director of consumer awareness and education.
Its possible for a minor to have a legitimate account reflected in their credit history, for example a parent may add a minor child as an authorized user, Griffin says. While Experian doesnt knowingly collect information about minors, such accounts may be reported and appear in the credit history. If an account was opened legitimately, it might remain in the credit history.
You could also provide a police report or other identity theft report you put in, and upload the documentation related to this. This would help the credit bureau to act to suppress this account from your credit report while the dispute process goes on.
Its possible for a minor to have a legitimate account reflected in their credit history, for example a parent may add a minor child as an authorized user.
Family fraud is among the most challenging issues to resolve because of the emotional toll it takes, Griffin said. If the consumer is not willing to file a police report it may be difficult to remove the account as fraudulent.
Protect Documents With Personal Information
If you have documents with your childs personal information, like medical bills or their Social Security card, keep them in a safe place, like a locked file cabinet.
When you decide to get rid of those documents, shred them before you throw them away. If you dont have a shredder, look for a local shred day.
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Does Your Child Have A Credit Score
Typically, only people over the age of 18 have a credit score but it is possible for minors to have a credit report. A person under 18 can have a credit report if:
- Their identity was stolen and used to open one or more credit accounts.
- A credit agency erroneously created a credit profile in the minor’s name.
- An adult added the minor as an authorized user or opened a joint account in the minor’s name.
Service Station Or Gas Card
Once your kid starts driving, consider getting them their first gas credit card. More likely than not, the card will have to be in your name. However, just having a gas card will allow them to get their feet wet with credit without the temptation or ability to go off the deep end. Also, because many gas stations now have mini-marts, it allows them to make small purchases that theyll still be required to budget and account for at the end of the month.
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Consider Setting Some Ground Rules For Your Child
Setting some ground rules with children before letting them use authorized user credit cards is always a good idea. Make sure youre both on the same page about what your kids can and cant use the credit card for.
Here are some topics to discuss:
- How much can your children spend each month?
- What items are they allowed to purchase?
- At which stores are they allowed to spend?
- Is permission necessary before making a purchase?
- How will they pay for their purchases?
- Will they make payments to you or pay the bank directly?
- How long will they remain authorized users?
Also, be sure to talk about what happens if they dont follow the rules. Will you take their credit cards away or restrict their purchases somehow?
Your child does not necessarily need to use the authorized user credit card or even have possession of it for it to build their credit history. You can add their names to a card and hold onto the physical authorized user cards to prevent any mishaps.
Keeping cards away from your child doesnt help them build good credit habits or provide access to funds in an emergencyit only creates credit profiles for them. To help them build good habits while limiting your exposure, ask your credit card issuer about setting lower credit limits on the authorized user cards.
Are You A Victim Check Your Free Credit Report
The quickest way to find out if someone is using your personal information for financial gain is to look at your credit report. Its free and lets you know whether your identity has been stolen. Visit AnnualCreditReport.com, to request a free credit report, once every 12 months, from each of the major credit bureaus, Experian, Equifax and TransUnion.
You will be asked questions to verify youre who you claim to be. Once thats established, youll be able to pull the report up online and print it out or have it mailed to you.
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Benefits Of Kids Having Credit Cards
As unconventional as it may seem, there are real benefits to credit cards for kids.
Did you know that 15% of your credit score is determined by the length of their credit history? Itâs true.
Hereâs the full breakdown:
Compared to payment history and total available credit, credit history is one of the hardest things to build because it takes time.
Even if a young adult is the picture-perfect credit card user, time is not on their side.
Someone with a more established credit history is more likely to have a higher credit score. With a higher credit score, your children will:
- Pay less for car insurance premiums
- Be more likely to be approved for an apartment or house rentals
- Qualify for lower interest rates
- Avoid security deposits on cell phones or utilities
Thatâs a pretty big gift to give, donât you think?
Credit history is not the only benefit to credit cards for your kids. In addition to building good credit, credit cards for your children can help boost their financial literacy.
Instead of being forced to learn the hard way, credit cards for kids offer the opportunity to teach the following before stepping into the world on their own:
- responsible borrowing habits
This will certainly give them an advantage over their peers who are opening credit cards for the first time when they leave home for college and are making financial decisions without any input or modeling from their families.
Take Out A Personal Loan
Personal loans often have high interest rates, but when there is a need and is used responsibly they can help borrowers establish credit. Taking out a small personal loan may help a young person enhance their credit mix in a healthy way. Only take out a loan in an amount that you know you can confidently pay back.
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Sign Up For A Secured Credit Card
Secured credit cards, like credit-builder loans, help consumers move their credit in a positive direction. When a person opens a secured card, they make a small deposit that serves as collateral and effectively becomes their credit limit. Before committing to a secured credit card, be sure to do research on the types of fees, annual fees and/or interest rates that may come with the card. You should also confirm that the secured credit card you’d like to use reports activity to the credit bureaus since there may be some secured cards that do not.
Help Them Save Early For A Secured Credit Card
If your teenager is interested in opening their first credit card at 18, you might want to encourage them to save up the deposit required to open a secured credit card. In some cases, if you have a savings account at a bank or credit union, you can borrow against that account to open a secured card.
For example, if your teen opens a savings account at the Digital Federal Credit Union , they could save toward a deposit on a DCU Visa® Platinum Secured Credit Card.
On DCU’s website, it states:
“If you are looking to establish or improve your credit history, this credit card is a great way to get started. By allowing you to borrow against your DCU savings account, this card gives you all the benefits of DCU’s Visa Platinum Credit Card.”
Benefits include no cash advance fee and optional overdraft protection that lets users link a credit card account as a backup to their DCU checking account to avoid overdraft fees.
Rod Griffin, director of public education and advocacy for the Experian, tells CNBC Select that this strategy accomplishes two things: teaches teenagers credit card basics and establishes good savings habits.
“They understand that if they fail to pay their credit card bill, their savings account is going to be taken away and they are going to get a ding in their credit score,” Griffin explains. But if they do it right, they can continue to grow their savings while also building good credit.
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You Can Start Building Your Childs Credit Today
You can begin building your childs credit whenever you want to by making him or her an 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. In many cases, issuers don’t set an age minimum for authorized users, because they’re not responsible for any of the bills.
Authorized user status allows your child to benefit from your good . It wont have the same credit-building power as being the primary user on an account, but its a start.
You dont even have to give your child a card until you feel he or she is ready for the responsibility simply being the authorized user on paper is enough to do the trick.
There are other opportunities to help when your child is becoming a financial adult and they’ll pack more punch than authorized usership, too. For instance, if you are in a financial position to do so, you can co-sign your child’s first credit card. 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.
If you have had setbacks with credit or your own experience with credit is limited, your adult child can use other tools to establish credit, such as:
The Famzoo Prepaid Card
If you want to keep the training wheels on, thereâs an outstanding alternative to credit cards for kids under 18. The FamZoo prepaid card is a strong choice because parents and children both get access to the same account.
With FamZoo â their tagline is âpreparing kids for the financial jungle â there are different protection features.
You can lock or unlock the card and even connect its usage to various chores. For instance, you can use FamZoo to post chores youâll pay for. Your children can then check the chores off once theyâve completed them and be paid automatically through the FamZoo app.
Another perk of FamZoo is that it helps teach kids how to budget at a young age. It accomplishes this via its app, which allows kids to split their money into four categories:
- spending
- investing
- charity
Not only can kids allocate money responsibly, but parents can also incentivize positive money habits by matching their savings and investing contributions.
Parents can even set up an interest rate and pay interest on savings. Children can then track how their savings grow as a result of the interest they earn.
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Teach The Difference Between A Debit Card And A Credit Card
When your child is young, they will observe you swiping your card at the checkout, and they will easily make the connection that a card is a lot like cash.
But while a debit card is cash in essence, a credit card is borrowed money. So well before your child starts using their own debit card, they should understand the difference.
“Having a debit card does not help build credit,” Sheehan explains, “but the habits formed from responsible debit card usage translates to more complex topics like credit cards and borrowing.”
Heres The Best Way To Get Credit Cards For Minors:
Becoming an authorized user is the only way to get credit cards for minors in order to establish credit. Once an authorized user is no longer a minor, they can add their own credit card account to the mix.
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Is An Authorized User Relationship Or A Joint Account Holder Better
It depends on the situation. If youre opening an account to share with a partner or spouse, than a joint account holder relationship may be the way to go. However, note that few issuers still offer joint credit card accounts. If you are just extending your credit line to someone else or want to help a family member build credit, then an authorized user relationship is likely the right choice.
Do They Understand Credit Cards
Because there are so many cashless ways to send and receive money, it can be difficult for kids to conceptualize money. Your kids need to have a basic understanding of interest rates, balances and credit limits. Keep them focused on the basics of credit usage, especially if they have a rewards card that incentivizes them to spend.
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