Instead of co-signing for your child and potentially putting your own credit score in jeopardy, did you know that you can build your child's credit by adding them as an authorized user on your own credit card?
Imagine your child or teen not only having large cash reserves, investments, and assets but also having superb credit because of the steps that YOU took to give them a head start!
And we know what you're thinking , "My child is not old enough to have a credit card!"
Although you need to be 18 or older to open a credit card account, your child does not have to be 18 to be added as an authorized user. They also do not have to have a card of their own to benefit.
By being an authorized user, as long as you, the primary cardholder, continue to keep your utilization low and make on time payments, by the time your child becomes an adult they can have a near perfect credit score and this reduces their need for a co-signer for larger purchase items such as a car or a mortgage.
By adding your child as an authorized user on your credit account, this allows them to benefit from your positive credit history without the full responsibility of managing the account. However, you will want to make sure that the credit card company reports authorized user activity to the credit bureaus, as this will help your kids start building their credit profile.
Below are a list of some of the most common credit card companies and their minimum age requirements for adding an authorized user:
So...How Do I Start?
Adding your child as an authorized user is a relatively easy process. Many of the above credit card companies allow you to complete this process easily through their online web portal or mobile app. You can also call their customer service department and they will walk you through the process. In addition to your child's first and last name, you will typically have to also provide their date of birth and social security number.
"Is it really that easy?" The short answer is, yes. However, let's review some pros and cons first:
Pros:
Early Credit Education: Adding your kids as authorized users allows you to introduce them to the world of credit at a young age. It's a valuable opportunity to teach responsible credit management, budgeting, and financial literacy.
Credit Building: Positive account activity, including on-time payments and low credit utilization, can help your kids establish a credit history early, giving them a head start when they venture out on their own.
Credit Boost: Your good credit habits can provide an immediate boost to their credit scores, which can be advantageous when they apply for loans or credit cards in the future.
Cons:
Shared Responsibility: Adding your kids as authorized users means they can make charges to the account if you provide them with a card and you are now responsible for those charges. If they misuse the card, it could negatively affect your credit.
Impact on Your Finances: If you give your child a card to use, your credit utilization may increase, potentially lowering your own credit score. Ensure you maintain control over the card and set clear spending limits. Thankfully, many credit cards now allow you to temporarily 'freeze' the accounts of your authorized card holders as well as set maximum spending limits.
Teaching Responsibility: There's a risk that your kids may not learn responsible credit habits if they don't actively participate in managing the card or if they see it as a "free pass" without consequences. Thankfully, we have some tools to teach them how to develop responsible credit habits and money management skills to help avoid this kind of behavior.
Fees: Some credit cards may charge fees to add authorized users. You will want to ask to verify the amount and frequency of the fees.
While adding your child as an authorized user is just a start, in today's world, financial literacy is more critical than ever. Building a strong credit score is a fundamental aspect of financial health, and it's a skill that we should pass down to the next generation. Below are some essential ways to help your children build a strong credit profile.
Start with Education:
Financial education is the cornerstone of responsible financial management. Begin by explaining the basics of credit, emphasizing the importance of paying bills on time and in full. Use relatable examples to illustrate how credit works and how credit scores impact their lives. Encourage questions and open discussions about money. The more informed your children are, the better equipped they'll be to make wise financial decisions.
Help your kids learn how to maintain their good credit using our financial curriculum available through our e-learning platform here.
Open a Secured Credit Card:
Secured credit cards are great alternatives to use in lieu of unsecured credit cards. They are excellent tools for young adults with little or no credit history. These cards require a cash deposit as collateral, which serves as their credit limit. While they won't have access to a large credit line, they can use the card responsibly to establish a positive credit history. Monitor their usage and make sure they understand the importance of paying on time.
Monitor Credit Reports:
Teach your kids and teens the importance of regularly checking their credit reports. You can obtain one free credit report per year from each of the three major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com. Review their credit reports together to ensure accuracy and address any errors promptly. This habit of monitoring their credit will help them catch and resolve issues early and maintain a healthy credit profile.
Empowering the next generation with financial knowledge and responsible credit management skills is an invaluable gift. Remember, the journey to excellent credit is a marathon, not a sprint. As parents we want to make sure that we are patient and supportive as they navigate the world of personal finance, and together, you can ensure a brighter financial future for your entire family.
Thankfully, KidVestors helps parents by also teaching your kids the importance of maintaining good credit and without going into debt. View some of our resources below and set your #KidVestor up for success by teaching them EARLY.
FINANCIAL EDUCATION & INVESTING FOR KIDS AND TEENS
FREE LIVE CLASS FOR PARENTS
Enroll your student in our financial literacy course and app here.
If your school or group is looking for a finance curriculum to teach your students about how to manage money, start here to learn more on how to bring KidVestors to your classrooms!
Parents, teach your kids money and make money conversations normal in your household by visiting here.