How to help your child build credit

All parents do what they can to give their kids a good head start in life. To help them get ahead financially, parents can assist them in building their credit history and good credit habits early.

“The best time to plant an apple tree was 20 years ago,” Chaim Geller, financial advisor, and personal finance expert at Help Me Build Credit said, “With credit, it’s the same. It’s never recommended to wait to start building credit when you need it because at that time, it might be too late. Start building credit early on in life so that when you need it, your credit score will be solid thanks to the many years of credit history you have.”

Keep reading for some insight into why it’s beneficial to your children if you help them start building credit before they turn 18, or as young adults, and what steps you can take to assist them.

The benefits of building credit early on

Having a strong credit score makes navigating a lot of areas of adult life easier. From renting an apartment to getting a job to applying for credit products, a good credit score can help you achieve your financial, personal and professional goals.

This is why it can be so beneficial to help your child or teen build their credit history from a young age – the length of your credit history has a big impact on how strong your credit score is.

For example, when it comes to your FICO credit score, your credit history accounts for 15% of your total score. To determine your credit history, FICO looks at how long you’ve had each specific credit account open.

While there’s no set account age that you need to achieve, generally having an account open for seven years is considered beneficial. If you help your child start building their credit history before they turn 18, by the time they are young adults they will have some solid credit history length under their belt.

When you can start helping your kids build credit

Because you need to be 18 to apply for credit cards on your own, most individuals start building their credit history after they turn 18. But there are a few ways that a minor can establish a credit history:

• If an adult adds them as an authorized user on one of their credit accounts
• If an adult opens a joint account in the minor’s name
• If their identity was stolen and someone used their personal information to open a credit account
• If a credit agency mistakenly created a credit profile in the minor’s name

While the last two examples are undesirable ways to start a credit history, parents can help their kids begin their credit journey in a positive way.

So, at what age can you start to help build your child’s credit? According to Geller, that depends on the financial company whose products you want to authorize your child to use.

“A good head start to get your child’s credit off the ground is adding your child as an authorized user on one of your credit cards,” Geller explained, “This is known as piggybacking credit.” Your credit card will show on your child’s credit report and jumpstart their credit history.

Banks and credit card issuers have different rules for which age they will allow an authorized user to be added. Some don’t have a minimum age requirement, whereas others, like American Express (13 years old) and U.S. Bank (16 years old), do.

“Although your child is eligible to be added as an authorized user, some even as fast as the day they are born with some banks, I don’t see the urgency to do it before your child is old enough to understand the concepts of credit,” Geller said, “I think a good age to start is at 15 or 16 years old.”

What you can do to help them build credit

Ben Arbov is the founder and CEO of Greatest Gift, a financial gifting platform for children’s long-term savings that teaches parents how to save and invest for their children. Arbov is a proponent of parents lending their kids a helping hand when it comes to credit. “Parents can start building credit for their kids at any age,” Arbov said. “A key factor in determining credit is the length of credit history, so the sooner you start, the better.”

If you want to help your child build their credit history and teach them about responsible credit habits, keep some of these tips in mind.

Add them as an authorized user on your credit card

One quick and easy way to help your child build their credit is to add them as an authorized user on your credit card. When you do this, your child will get their own credit card, but it will be directly linked to your credit card account, which allows you to see what they’re charging to the card.

At the end of the day, you’ll be the one making payments each month, so make sure you instruct them on how much they can spend using the card. You may want them to reserve this card for emergency purchases or to make a plan to pay you back for any purchases they make.

Alongside helping them build a credit history, allowing them to dip their toes into credit card usage gives you the opportunity to teach them about how to be responsible with credit.

“It’s highly recommended to add your child as an authorized user to one of your cards to jumpstart their credit even before they turn 18,” Geller said, “Just make sure to add your child as an authorized user using their Social Security number so it properly reports on their credit report.”

Consider a secured credit card

If your child is over the age of 18, but isn’t ready to manage the full responsibility of taking on a credit card, you can help them get a secured credit card. Without a strong credit history, it can be hard to get credit cards, especially ones with good interest rates and credit limits. Secured credit cards are much easier to qualify for.

The way a secured credit card works is that you put down an initial deposit, and the user can charge only up to the amount of that deposit. Parents can provide the initial deposits for a secured credit card, and their child can start to build good credit card habits in a safe way, since they can’t charge more than that initial deposit.

Secured credit cards help you build credit (confirm that the credit card issuer is reporting your payments to credit bureaus), but don’t allow you to spend more than you can afford to pay off, thanks to that deposit.

Educate them on good credit habits

Howard Dvorkin, CPA and chairman of Debt.com and author of “Power Up: Taking Charge of Your Financial Destiny,” compared building credit with voting. “You need to be 18, but you can start preparing years before,” Dvorkin noted. “You can learn how things work so you can make informed decisions when the time comes. Since the minimum age for a credit card is 18, parents should use the years before that to teach their children how to be financially responsible adults.”

Even though it’s an indirect method, Arbov agrees that financial education is an important part of preparing your child to build a healthy financial life. “Learning financial literacy from a young age can prepare kids to build and maintain their credit without going into debt,” Arbov said. “Teach teens to use credit responsibly. Give them a secured credit card and teach them to make payments on time and in full. Help them build their credit history and teach them how to use credit cards, so they don’t go into a lot of debt later when they’re on their own.”

Jessica Chase, a loan and finance expert at Premier Title Loans, strongly recommended that parents also teach their children about how to read a credit report. “Your children should be well-aware of how to read credit reports,” Chase said. She also suggested explaining in detail how a good record on the report helps secure their future, as well as how to detect fraudulent activities on their account.

How to protect your credit when helping your child

When you add your child as an authorized user on one of your credit accounts, you do risk harming your credit if they don’t manage this responsibility properly.

Arbov explained that, “If parents help by adding their kids as authorized users on their credit cards or car loans, there’s a risk of negatively affecting the parent’s credit, especially if they leave the kids in charge of making the payments. Any late payments will negatively affect the parents’ credit, so make sure the kids make all their payments on time in full.”

To avoid potential damage to your credit score, Geller recommended not allowing them to actually use the credit card you’ve added them to. “When adding your kid as an authorized user on one of your accounts, you don’t necessarily need to give your kid the card to use in order for them to reap the benefits,” Geller explained. “If you do decide to let the child use the card then make sure they are well educated on what a credit card is. It’s not free money. They shouldn’t be going on a shopping spree and max out the card. This will hurt both of your credit scores, and you will ultimately need to pay the bill.”

On the flip side, by adding your child as an authorized user, you need to make sure you don’t do anything that can harm their credit. According to Geller, if you add your child as an authorized user to one of your cards, you have to be careful not to max out the card or have any late payments, as this will negatively affect your child’s credit.

Bottom line

If done the right way, helping your child build their credit from a young age can give them a leg up once they reach adulthood. It’s key to remember that teaching them about how to use credit responsibly and how to build good financial habits is just as important. You may want to wait until their teen years to help them start their credit journey, but you can start talking about how to manage money much earlier on.