All parents do their best to give their children a good start in life. To help them succeed financially, parents can help them build their credit history and good credit habits early on.
“The best time to plant an apple tree was 20 years ago,” said Chaim Geller, financial advisor and personal finance expert at Help Me Build Credit. “It’s the same with credit. It is never a good idea to wait to start building up credit when you need it, because it may be too late at that time. Start building credit at an early age so that when you need it, your credit score is solid thanks to the years of credit history you have.”
Keep reading to understand why your children benefit from helping them start earning loans before they turn 18 or as a teenager, and what steps you can take to help them.
Benefits of getting a loan early
Having a strong credit score makes it easier to navigate many areas of adulthood. From renting an apartment to getting a job and applying for loan products, a good credit score can help you achieve your financial, personal, and professional goals.
That’s why it can be so helpful to help your child or teen build their credit history from an early age – the length of your credit history has a big impact on how strong your credit history is.
For example, when it comes to your FICO credit score, your credit history is 15% of your total score. To determine your credit history, FICO checks how long you have been open for each specific credit account.
While there is no set account age that you need to reach, it is generally considered advantageous to have an account open for seven years. If you help your child start building his credit history before he turns 18, by the time he becomes a young adult, he will have a solid credit history under his belt.
When can you start helping your kids earn credit?
Because you must be 18 to apply for a credit card on your own, most people start building their credit history after they turn 18. But there are several ways that a minor can create a credit history:
- If an adult adds him as an authorized user to one of his credit accounts
- If an adult opens a joint account in the name of a minor
- If their identity was stolen and someone used their personal information to open a credit account
- If a credit agency has mistakenly created a credit profile in the name of a minor
While the last two examples are not desirable ways to start a credit history, parents can help their children start their credit journey in a positive way.
So, at what age can you start helping your child build creditworthiness? It depends on the financial company whose products you want to allow your child to use, according to Geller.
“A good start to getting your child’s loan from scratch is to add your child as an authorized user to one of your credit cards,” Geller explained. “This is known as extra credit.” Your credit card will appear on your child’s credit report and give a boost to their credit history.
Banks and credit card issuers have different rules for which authorized users are allowed to be added. Some do not have a minimum age limit, while others, such as American Express (13 years old) and US Bank (16 years old), do.
“While your child is eligible to be added as an authorized user, some even as fast as the day they were born in some banks, I don’t see the need to do this before your child is old enough to understand credit concept. “I think a good age to start is 15 or 16,” Geller said.
What can you do to help them build credit
Ben Arbov is the founder and CEO of Greatest Gift, a financial gift platform for long-term savings for children that teaches parents how to save and invest for their children. Arbov is a proponent of parents giving their children a helping hand when it comes to credit. “Parents can start creating loans for their children at any age,” Arbov said. “A key factor in determining credit is the length of your credit history, so the sooner you start, the better.”
If you want to help your child build their credit history and teach them responsible credit habits, keep some of these tips in mind.
Add them as an authorized user to your credit card
One quick and easy way to help your child increase their credit is to add them as an authorized user to your credit card. When you do this, your child will receive their own credit card, but it will be directly linked to your credit card account, allowing you to see how much they are charging from the card.
After all, you will be making monthly payments, so be sure to let them know how much they can spend with the card. You may want them to reserve this card for emergency purchases or set up a cash back plan for any purchases they make.
As well as helping them build a credit history by allowing them to dive into using credit cards, you are giving them the opportunity to teach them how to be responsible with credit.
“It is highly recommended that you add your child as an authorized user to one of your cards to speed up their credit even before they turn 18,” Geller said. Properly reports your credit history.
Consider a secured credit card
If your child is over 18 but is not ready to take full responsibility for getting a credit card, you can help them get a secure credit card. Without a good credit history, it can be difficult to get a credit card, especially 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 make an initial deposit and the user can only charge up to the amount of that deposit. Parents can make initial deposits on a secured credit card and their child can begin to develop good credit card habits in a safe way as they cannot charge more than this initial deposit.
Protected credit cards help you build credit (confirm that your credit card issuer reports your payments to the credit bureaus), but prevent you from spending more than you can afford to repay with that deposit.
Teach them good credit habits
Howard Dworkin, Chartered Accountant and Chairman of Debt.com, and author of Power Up: Take Charge of Your Financial Destiny, likened credit creation to voting. “You have to be 18, but you can start preparing years earlier,” Dworkin said. “You can learn how things work so you can make informed decisions when the time comes. Because the minimum age for a credit card is 18, parents should use the years prior to that to teach their children to be financially responsible adults.”
Although it is an indirect method, Arbov agrees that financial education is an important part of preparing your child for a healthy financial life. “Teaching financial literacy from an early age can prepare kids to build and maintain their credit without going into debt,” Arbov said. “Teach teenagers how to use credit responsibly. Give them a secured credit card and teach them how 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 get into big debts later when they’re alone.”
Jessica Chase, credit and finance expert at Premier Title Loans, strongly encouraged parents to also teach their children how to read a credit report. “Your kids need to know how to read credit reports well,” Chase said. She also offered to explain in detail how a good report entry helps secure their future, as well as how to spot fraudulent activity on their account.
How to protect your credit by helping your child
When you add your child as an authorized user to one of your credit accounts, you run the risk of damaging your credit if they fail to perform this duty properly.
Arbov explained that “if parents help by adding their children as authorized users to their credit cards or car loans, there is a risk of adversely affecting the creditworthiness of the parents, especially if they leave the children in charge of making payments. Any late payments will negatively affect the creditworthiness of parents, so make sure children make all their payments on time and in full.”
To avoid potential damage to your credit history, Geller recommended not letting them actually use the credit card you added them to. “When you add your child as an authorized user to one of your accounts, you don’t have to give your child a card to use in order for them to enjoy the benefits,” Geller explained. “If you decide to allow a child to use a card, make sure they are well-informed about what a credit card is. It’s not free money. They should not shop and make the most of the card. This will hurt both of your credit scores and you will end up having to pay the bill.”
On the other hand, when adding your child as an authorized user, you must ensure that you are not doing anything that could damage their creditworthiness. If you add your child as an authorized user to one of your cards, Geller says, you should be careful not to run out of card or have late payments, as this will negatively impact your child’s credit.
Done right, helping a child build his creditworthiness from an early age can give him an edge when he comes of age. It is important to remember that it is equally important to teach them how to use credit responsibly and how to develop good financial habits. You may want to wait until your teens to help them get started on their credit journey, but you can start talking about how to manage your money much earlier.