Building good credit takes time, so many parents have started helping their kids earlier than ever.
Most of us recognize the value — and honestly, necessity— of a healthy credit report. After all, our credit history comes into play when we buy a home, open a new credit card account, buy auto insurance, and sometimes, even when we apply for a job.
Building a solid credit history takes time and dedication, though, which is why some parents push their children to start building credit early. But how soon is too soon, and can you help your child along the way?
When to Start Establishing Credit
When it comes to building a healthy credit report, the sooner you start, the better. These early lessons will not only influence their future financial decisions, but your child will also grow his or her average age of accounts (AAoA) and show a history of responsible credit management along the way.
But when should you begin?
There’s no hard and fast rule here, but many parents start this process in the young teen years (13-16) or earlier. In fact, a recent study found that 17% of children ages 8 through 14 have already used a credit card, with about a third of those same youngsters having regular financial conversations with their parents.
While you may not see the fruits of your labor until your child turns 18, you will have laid the groundwork for a lifetime of healthy credit if you begin early.
17% of children ages 8 through 14 have already used a credit card.
5 Ways to Help Teens Build Credit
As a parent, there are many things you can do to not only teach important financial lessons, but actually spearhead the credit-building efforts for your child. The older they are, the more significant the impact will be, especially once they turn 18 and can really take advantage of certain accounts and products.
Here are five things you can do to help your child build credit now and for the future.
1. Check Credit Reports First
Whether your child is 17 months-old or 17 years-old, checking their credit reports should be on your radar at regular intervals.
Checking your child’s credit reports allows you to quickly spot any potential errors or fraud. That way, you can correct them before they become an even bigger issue; after all, identity theft can happen to anyone, at any age!
You can also set credit monitoring alerts at this time, so you will know if and when any changes occur. As your child gets older, let them be a part of the credit-pulling process. You can explain the importance of each section, and even let them see a copy of your credit report for comparison.
2. Freeze Credit Reports When Not in Use
Don’t stop at just checking your child’s credit every once in a while: Consider locking it down before fraud ever happens with a security freeze.
You can freeze all three of your child’s reports until their credit is needed, at no cost. Then when you (or they) are ready to add an account, simply unfreeze the reports with a few clicks.
This practice helps prevent fraudulent activity and errors in the future, as no one else should be able to open an account in your child’s name.
3. Add Them as an Authorized User
One very easy way to help your child build credit is to add them as an authorized user on your existing credit card account(s). You can spend as usual while your child reaps the benefits of your positive credit activity, whether or not you give them a physical card to spend on.
Each credit card issuer — and sometimes, each individual card product — has its own rules regarding the minimum age of authorized users. For example, your child will need to be at least 15 in order to be added to a Discover account, but only needs to be 13 for an American Express card.
Now, these accounts aren’t technically supposed to show up with the credit bureaus until your child turns 18, but some parents say they have seen it happen earlier. Either way, once a responsibly managed account does get added to your child’s credit report(s), it will immediately begin to improve their credit history.
The report will include either the date they were added to the account or the date the account was opened (depending on how the issuer chooses to report it), so this can further compound the positive impact for your young adult.
4. Help Them Open a Credit Card Account
Once your child turns 18, you may choose to help them open — and manage — their first credit card account. This might mean offering simple guidance, cosigning on the account, or even putting up the deposit required for a secured credit card.
While your child will ultimately be in charge of the account, you can use this opportunity to really explain things like fees, late payments, and compound interest. And if they are still living at home, you may even choose to oversee the account to head off any potential problems.
5. Cosign on a Loan
Many parents cosign loans with their children as a way of both helping them build credit and allowing them access to funding for which they might not yet qualify. This could include cosigning on student loans for their first year of college or even cosigning on a vehicle purchase.
It’s important to know your child and their level of responsibility before you cosign on a loan with them. After all, if payments are late or skipped, your credit will also be dinged. If your child defaults entirely, you will still be on the hook for the debt.
However, if you believe that your child can manage the repayment in a responsible way, cosigning can be very helpful. It could not only allow them to get them approved for the loan but might also snag them a better interest rate. And if it’s a student or auto loan, your child can always refinance later once their credit is a bit more established.
Additionally, you may want to help your child look into a credit-builder loan. These typically don’t require a cosigner and are designed for (as the name implies) those who want or need to build their credit.
How Parents Can Protect Themselves in the Process
While helping your child build credit is important, it shouldn’t come at parents’ expense. Luckily, there are a few ways parents can protect themselves and their credit, while still helping the kids build their score:
- Only add children to an account that offers free authorized users or has an annual fee that can be recouped easily.
- Help your children automate payments or establish a schedule to ensure a positive payment history.
- Set the expectation that your child will refinance a cosigned loan after a specific period of time, to remove your financial obligation on the account.
In that same vein, there are a couple things you should not do:
- Do not give your child a physical credit card if they will not spend responsibly, even if they are listed as an authorized user on the account.
- Do not cosign on a loan or credit card if your child isn’t responsible enough to manage it, or if they won’t allow you access to the account.
Helping your child(ren) establish credit may require some work on your end, but it doesn’t have to be a sacrifice, and it doesn’t have to negatively impact your own credit along the way.
It’s Not All About Credit
Helping your child build credit involves so much more than just credit-based accounts. If you want to deepen the impact and ensure a lifetime of healthy credit, you also need to teach some key financial lessons in the process.
After all, starting out with a solid credit score won’t matter if your child doesn’t understand responsible money management, or simply destroys that credit in the near future.
Some important financial lessons, which can affect your child’s credit for decades to come, include:
- Teaching them how to budget and spend within their means, starting at a young age
- Stressing the importance of saving, including an emergency fund in a dedicated savings account; that way, an unexpected expense doesn’t automatically mean relying on credit
- Explaining the long-term effects of credit mismanagement, such as late payments and charge-offs, which will follow your child for at least seven years
- Talking to them about your own mistakes, past and present, and how they have impacted you financially
As parents, we work hard every day to ensure a bright future for our children. For many of us, this means teaching them from our own mistakes and sometimes, even helping to set them up for success.
You can help your child start building their credit long before they turn 18. Though, as helpful as a healthy credit score can be to a young adult, the financial lessons you teach in the process could last them a lifetime.
About The Author
Stephanie Colestock is a DC-based personal finance writer with an expert focus on credit and lending. With over ten years of industry experience, she is a regular contributor on sites such as Credit Karma, The Balance, Quicken Loans, Dough Roller, Finance Buzz, and more. She enjoys teaching people how to optimize their finances and save themselves money in the process.