Can Kids Build Credit? A Guide for Parents

Building a strong credit history is important for financial goals like securing loans or favorable insurance rates. Understanding how to establish credit early provides a significant advantage in adulthood, leading many parents to wonder how their children can begin this process before legal adulthood.

Can a Minor Obtain Credit

Individuals must reach the age of majority to enter into legally binding contracts, including credit agreements. In most states, this age is 18, though it varies. This legal principle protects minors from potentially unsound financial decisions. Consequently, a minor cannot apply for a credit card or loan independently.

However, specific situations and methods allow younger individuals to start building a credit history, often with adult support. These avenues bypass contractual limitations, allowing them to gain credit reporting experience. While direct applications are not feasible, indirect participation can be a valuable starting point.

Methods for Establishing Credit History

Parents can help their children establish credit history before adulthood through several methods, each with varying degrees of parental involvement. These strategies provide a foundation for future financial independence.

Authorized User

A common method is to add a child as an authorized user on an existing credit card account. An authorized user receives a card linked to the primary account but is not legally responsible for payments. To add someone, the primary cardholder provides the authorized user’s full name, date of birth, and Social Security number. This method works because the primary cardholder’s payment activity is reported to credit bureaus for the authorized user. Some card issuers have minimum age requirements for authorized users.

Secured Credit Card

For older teens aged 18 and above who can enter into contracts, a secured credit card presents another option. A secured credit card requires a cash deposit, which acts as collateral and sets the credit limit. Deposits typically range from $200 to $300, though amounts vary. The application process involves providing personal information and making the initial deposit, requiring a bank account.

Student Loans

Student loans can also contribute to a credit history for individuals aged 18 and older. While the primary purpose of these loans is educational funding, federal student loans can positively impact credit scores when repaid consistently and on time. Even during periods of deferment, student loans may appear on credit reports. Responsible repayment demonstrates an ability to manage long-term financial obligations.

Cosigned Loan

Another avenue for individuals aged 18 or older is to have an adult cosign a loan. This arrangement means the cosigner agrees to be legally responsible for the debt if the primary borrower defaults. Both the primary borrower’s and the cosigner’s credit reports reflect the loan, allowing the younger individual to build credit through timely payments. However, if payments are missed, both credit scores can be negatively affected.

Understanding Credit Scores

A credit score is a numerical representation of an individual’s creditworthiness, used by lenders to assess risk. Various factors contribute to this score, with each carrying a different weight. Understanding these components helps build a positive credit profile.

Payment history (35%): This reflects whether bills are paid on time, demonstrating reliability.
Credit utilization (30%): This is the proportion of available credit currently being used. Lower utilization is more favorable.
Length of credit history (15%): This reflects how long accounts have been open and their average age. A longer history can be beneficial.
New credit (10%): This represents recent applications. Opening too many new accounts quickly can signal higher risk.
Credit mix (10%): This refers to the variety of credit types managed, such as credit cards, installment loans, and mortgages. It demonstrates an ability to handle different financial products responsibly.

Responsible Credit Management

Establishing credit is the first step; effective management cultivates a robust credit profile. Consistent financial habits influence credit health, ensuring positive and lasting results.

Making Payments on Time

Making all payments on time is important. Payment history holds the most weight in credit scoring models, so even a single late payment can negatively impact a credit score. Setting up automatic payments or reminders helps avoid missed due dates. Paying the full statement balance each month avoids interest charges and prevents debt accumulation.

Maintaining Low Credit Utilization

Maintaining low credit utilization is another important practice. This means keeping the amount owed on revolving credit accounts well below the available credit limit. Lenders prefer that individuals use less than 30% of their available credit. A lower utilization ratio signals responsible credit usage and can positively influence scores.

Monitoring Credit Reports

Regularly monitoring credit reports helps identify inaccuracies or potential fraud. Federal law grants access to a free credit report weekly from each of the three major credit bureaus—Equifax, Experian, and TransUnion—through AnnualCreditReport.com. Reviewing these reports allows for timely error correction.

Exercising Caution with New Accounts

Exercise caution when opening new credit accounts. While new credit is a factor in scoring, opening multiple accounts in a short timeframe can be viewed as risky by lenders. This behavior can temporarily lower a credit score. Thoughtful consideration helps maintain a stable credit.