How (and When) to Build Your Child's Credit

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As a parent, you're responsible for teaching your children many things. When kids are young, you help them learn how to talk and walk. As they grow, you show them how to read, write, and count. Eventually, you start to teach your kids the value of money and how to be financially responsible.

Part of those financial lessons may one day include credit — how to build it, use it and manage it the right way.

Keep reading for a breakdown of how (and when) to start helping your child build credit for the very first time.

Authorized User Status

Perhaps the easiest way to help a child build credit is to add him/her onto your existing credit card account as an authorized user.

Adding a child as an authorized user is typically easy. You just need to call your card issuer and make the request. Customer service will walk you through the process and you'll need to provide your child's name, perhaps with other personal information like date of birth and Social Security number.

When you add your child as an authorized user, you have the chance to help your son or daughter build credit without putting your own credit rating on the line.

Of course, like any credit building strategy, the authorized user method has some pros and cons you should consider before moving forward.

Pros

• Most card issuers will report credit history to Equifax, TransUnion and Experian for authorized users as well as primary account holders. (Here's a list of which card issuers report authorized user accounts to the credit bureaus.)
• Your child's credit could benefit from your good payment history and the age of your account (assuming the account has no late payment history and shows up on his/her credit reports).
• Some card issuers, like American Express, let you set monthly spending caps for authorized users. This keeps authorized user from charging more than you've given them permission to charge.

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Cons

• Some card issuers charge an annual fee for adding authorized users. This annual fee is often less than the one you pay as the primary card holder; however, they can still add up, especially on premium cards like the Platinum Card® from American Express and Chase Sapphire Reserve.
• If your credit card ever has negative information associated with it (like late payments or high utilization), the account could hurt instead of help your child's credit rating. However, you could call your card issuer and ask to have your child removed as authorized user (and likely remove the account from your child's credit reports) if that should happen.

Credit Builder Loans

Another strategy you can use to help your child build credit without the danger of co-signing is a credit builder loan. A credit builder loan is a low-risk financial product which is typically easy to qualify for, even with no previous credit history.

Here's how these loans could help your child establish credit.

1. Your child applies for a credit builder loan with a local credit union, community bank or online lender.
2. If approved, the loan amount is held by the lender in an interest-bearing savings account.
3. Your child makes payments to the lender for a short period of time (usually 12-24 months).
4. Once the final payment is made, the lender releases the loan from savings plus any interest earned.

Credit builder loans represent a great way for your child to establish credit on his/her own. Still, the method has some pros and cons you should know upfront.

Pros

• Because the loan is essentially secured with the money you're borrowing, lenders consider these products to be low risk. As a result, approval criteria isn't as strict, and you'll likely qualify for a loan with no credit history, little credit history or even damaged credit.
• At the end of the loan, you'll have a small fund (typically $500-$1,000 plus interest earned) which you could spend to start an emergency fund, pay down debt, or use however you choose.

Cons

• Some credit unions and online lenders don't report account history to all three credit bureaus. If a lender doesn't report your account to Equifax, TransUnion and Experian, you won't have the chance to build credit as effectively.
• Credit builder loans aren't free. Your lender may charge you interest and fees. Usually interest and fees are on the low side, but some lenders charge rates in the double digits. You should always check out loan terms in advance and shop around to make sure you're getting a good deal.

Why You Should Avoid Co-signing

You love your child and want to help your son or daughter establish a good credit rating (otherwise you wouldn't be reading this article). This desire to help might make you tempted to co-sign for your child's first credit accounts.

Co-signing, however, is a mistake you should avoid (and one you should teach your child to avoid as well).

When you co-sign, you put your own personal credit on the line. If your child manages the account poorly (even by mistake), your personal credit could take a hit. The credit damage caused by late payments and other derogatory activity can last for many years, even if you're "just" a co-signer.

Worse, when you co-sign you teach your children that doing so is a good way to help out a loved one. In reality, co-signing is a dangerous risk to the health of your own credit. Maintaining credit independence is an important lesson to teach your children early in life — one which can help them protect their own credit for years to come.

When Should You Start Helping Your Child Build Credit?

There's no perfect time to help your child start building credit. The "right" time is going to depend on two important factors – lender policies and your personal feelings.

Lender Policies

Authorized Users

As far as credit cards are concerned, there's no minimum age (legally speaking) that your child needs to reach before you can add him/her as an authorized user. The CARD Act does place age restrictions on when your child can open a credit card of his/her own (it's 21 years old or 18 years old with a job or co-signer, in case you're interested). However, the law doesn't impose age restrictions for authorized users.

Nonetheless, credit card issuers have their own policies as it pertains to how old authorized users need to be. Here's a look at minimum age requirements for authorized users, based on card issuer policy.

• 18 Years Old: Bank of America
• 13 Years Old: American Express, Barclays, Discover
• No Age Restriction: Capital One, Chase, Citibank, Discover, US Bank, Wells Fargo

Credit Builder Loans

Most credit unions and online lenders will allow someone to open a credit builder loan once they've turned 18 years old. Legally, you must be 18 to sign a contract, so a credit builder loan won't be an option anywhere before then.

Personal Feelings

There's no right or wrong age to start teaching your child about credit. If you want to use a credit card as a tool to educate your child about credit at a young age, you can add your son or daughter as an authorized user as soon as your card issuer allows it. If you think it's better to wait until your child is closer to 18 before you add him/her to your credit card, that's okay too.

Credit Education Is Key

There's nothing wrong with wanting to help your child establish good credit. Once your child enters the "real world," having good credit can make it easier to rent an apartment, buy a home, purchase a vehicle and even land a job.

Just remember: While helping your child establish good credit is a great idea, teaching your child how to manage credit and finances responsibly is the most important lesson you can pass on. Educate your kids about the importance of on-time payments, avoiding credit card debt and keeping an eye on their credit reports. If you don't, they might learn these lessons the hard way. That's probably the last thing you, as a loving parent, want to see happen.