Building credit is an important task for financially savvy adults. Unfortunately for most people when they turn 18, they start out with zero credit. Even worse, it can take years to build up good credit. Fortunately, you can help your child build credit with this one trick.
Why Start Building Credit Early
Although most of your credit score comes from other factors like how good your payment history is, one important factor in your credit is how old your credit history is. This age of credit factor starts when information starts getting put on your credit report.
So, all other things being equal, an 18-year-old who signed up for their first credit card or loan last month will have much lower credit than an 18-year-old with the exact same credit card or loan, but with an account that is two or three years old.
How To Build Credit for Your Child
Getting a loan for a 13-year-old is probably irresponsible. However, there is a trick to build your child’s credit fast and easy.
Add your child as an “authorized user” on one of your credit cards. The older the account, the better. Then, be 100% sure to make payments every time on time. The credit card company will report the account on your child’s credit report.
That account will count as the longest open account used for length of credit history. Not only that, but in addition to the longer credit history, your child will also have a payment history of months or years with 100% on-time payments. That is how you build good credit up.
Do I Have to Give My Kid a Credit Card to Build Credit?
If you are a financially savvy adult, you are worried about the prospect of your child having a credit card. It is right to be concerned. That is why you are giving your child a bit of a credit report, while you can still have the credit training wheels on, so to speak.
That is the beauty of adding your kid to your credit card as an authorized user. The credit card company will send a card with your child’s name on it, but there is no reason you have to give it to them. You can even shred it if you like, but first it needs to be used once.
Using the child’s card just once signals to the bank that the authorized user is actually a user on the account. While some banks will report information to the credit bureau even if you don’t use the card, there is no reason to take the chance that they will either delay reporting, or not report at all.
Again, you don’t have to give the card to your child. Use it to order a movie, or a Happy Meal, or pay at the pump for some gas. Then, lock the card away, or destroy it, whatever makes you feel more comfortable.
It should go without saying, but you can also ruin your child’s credit by doing this badly. Any missed payments go on your child’s account lowering their credit score by much more than having a long credit history will raise the credit score. You must commit 100% to paying this credit card bill every month without fail.
For this reason, it is best if you use a secondary card, or an account that you seldom use. Set that account to autopay at least the minimum payment every month so that you never forget.
Brian is a former certified financial planner and personal finance expert. Brian’s work appears in numerous publications and on numerous websites. You can find Brian’s freelance writing business at ArcticLlama.com