Kids are going to mess up, and helping children build credit can seem confusing. But it boils down to three simple strategies.
The goal is to teach kids to be responsible with debt while not letting their mistakes ruin their lives. Below are some ways that you can help, but it depends on the age and maturity level of your kids. If you want to start from the ground floor, begin with the first strategy and move on from there.
In the end, a great credit score is the result of a clean credit report. Debit cards and checking accounts do not help with credit scores. None of that information shows up on a credit report. The only way to start seeing items on a credit report is to start borrowing money.
The good news is that your freshman in high school doesn’t need a car loan or a student loan to start building credit. The simple way to build credit is by using credit cards.
Before you get started, be sure your child has a bank account so they can learn to pay off the credit card. A checking or savings account will work. Be careful of how many transactions an account allows you each month.
Strategy 1: You Have Control and Can See Everything
The best way to help a child build credit is to add them as an authorized user to your credit card. You don’t have to apply for a new card, and an extra card will arrive in the mail.
Since you stay the primary owner of the account, the bank statements get mailed or emailed to you. You can see every transaction on both cards, and you have the authority to fix any problems that might arise. Plus, you get all the cash back and other rewards.
The downside is that you are on the hook for all the payments. If your child gets their credit card stolen and someone racks up a bunch of charges, you are the one that needs to fix it. Also, some banks don’t report authorized users to the credit bureaus. Be sure the credit card you choose already does this.
Making your child an authorized user is a great first step in teaching them how to:
- Use a credit card in stores
- Pay bills online
- Read the credit card bill
- Pay off the credit card every month
If you feel that your child has shown a lot of responsibility as an authorized user, try the next strategy.
Strategy 2: Your Kid is in Control, With Limits
A secured credit card is a great stepping stone between a child being an authorized user and on their own. A secured credit card is different because it requires a deposit to get started. For example, if your child signs up for a secured credit card with a $500 deposit, his or her credit limit is now $500.
Your child can use a secured card and pay it off every month like a regular credit card. But unlike prepaid cards, a secured credit card doesn’t need “reloading.” The bank uses the deposit as collateral. If your child overcharges or forgets to pay the bill, the bank can shut off the card and use the deposit.
If your child gets a secured card in their name, the low credit limit prevents too much trouble. This also means that you are not legally responsible for paying the bills. If your child is late on a payment, it will show up on their credit report. Since your name isn’t involved, your credit score isn’t affected.
After this strategy, your kid may have enough of a credit score to get their own unsecured credit card. If you want one more option, check out the third strategy.
Strategy 3: Your Kid Has Complete Control, With Your Help
The final way that you can help a child build credit is to co-sign for a credit card. This strategy is as dangerous as co-signing for a car loan or mortgage. You don’t get any of the benefits and are on the hook for all the risk.
If you co-sign for a credit card, you are trusting your child to use it wisely and not make any mistakes. If your kid messes up, it will show up on your credit report and theirs. You are legally obligated to pay the bill if your kid does not.
There are few situations (if any) where I would suggest co-signing for a credit card. If you co-sign for a credit card (or already have), have your child apply for their own card as soon as they can.
Other Random Notes
If your child is old enough, you could get a joint credit card with them. Married couples usually get joint accounts with credit cards. You both get your own cards and can see each other’s purchases. A joint account requires a large amount of trust, so I would be careful if you’re thinking about this option. You can ruin your kid’s credit and vice versa.
Finally, don’t fret over student credit cards. They are normal credit cards but geared towards college students. The fees, interest rates, and rewards tailored for that age range. For example, some cards give extra cash back when spending more at restaurants and bars.