It’s not often you watch your child playing with toys and think: “I really need to help my kid build good credit.” Yet in a recent University of Cambridge study, adult money habits are typically set by the time a child is seven years old. Establishing good credit is imperative if you want to secure lower interest rates on financial products, a mortgage, or even a cell phone plan. “Even a small raise in your interest rate could increase the cost of your mortgage loan by thousands of dollars, or more,” financial consultant Miata Edoga tells Parentology.
We reached out to Edoga for easy steps to help your child build credit and start planning for their financial future, even if they’re not old enough to have a credit card.
When They’re Young
As long as you have a strong history of on-time payments, and your credit utilization rate is low, the easiest way to establish good credit for a young child is to make him an authorized user on your credit card. It’s a good idea to first verify your credit card provider does report authorized user accounts to the three major credit bureaus.
Authorized usership is different from a regular credit card application, because there’s no age minimum to be added. “The regular stipulations of being 18 years of age with an income doesn’t apply here,” Edoga says. “Your child isn’t paying any of the bills. You’re not necessarily giving them access to your card, you’re just adding their name to the account.”
What does this mean for your child? They can benefit from the credit history you’re creating as the primary user. When they’re old enough, they’ll have a proven track record of good credit behind them when they do apply for their first card.
Co-Sign Their First Credit Card
Once your child has reached the age of 18, there are a number of ways they can continue to practice good credit habits. If your child isn’t working, chances are you’ll have to co-sign their first credit card. This time, as opposed to being a silent member on your account, they’ll be responsible for their own credit card purchases — as long as you establish those parameters from the beginning.
“Only co-sign if you think your child is financially responsible and has shown good judgment in the past,” Edoga says. “Otherwise, you’ll be on the hook if they fail to make their payments.”
It’s important to set ground rules for credit card usage — what they can use it for, how they’ll manage payments, etc. If you think you can mitigate the risks involved, co-signing on a credit card or loan application where your child is the primary account holder will build their score at a much faster rate than being an authorized user.
Student Credit Cards
If your college-aged child has a part-time job and established themselves as a good financial candidate, a student credit card will help them continue to build their score. “Student cards have lower limits than other credit cards,” Edoga says, “so they’re a pretty safe choice.”
Many student credit cards have higher interest rates. Ideally, your child will pay the card in full each month, never carrying a balance, thus won’t be charged interest. But do make sure you both do your research to find the best fit.
Secured Credit Cards
If your child is 18 but doesn’t have the option of applying for a student card, they can apply for a secured card, where the financial institution requires them to put down a deposit to cover the credit limit. “Secured cards are a great option, because there’s no risk to the bank — you’ve already put the money down,” Edoga says.
Keep in mind many secured cards are fee-heavy, so your child must ensure they pay off the balance each month to keep their credit score pristine.
When helping your child practice good credit habits, it’s essential that they can differentiate between what belongs to them and what belongs to the bank. “Credit is essentially money you haven’t earned,” Edoga warns. “Treating it like ‘found money’ is a common pitfall and will definitely lead to more problems down the road.”