Does Adding a Child to a Credit Card Help Their Credit?
Explore the real impact of adding a child to your credit card on their credit profile. Understand the mechanics and critical considerations for their financial journey.
Adding a child as an authorized user to a credit card account can influence their financial standing. Credit scores represent an individual’s creditworthiness, influencing access to loans, housing, and employment opportunities. Understanding this process helps individuals make informed decisions about establishing a credit history for younger family members. This article explores authorized user status and other methods for credit development.
Understanding Authorized User Status
An authorized user is an individual permitted to use another person’s credit card account. While they receive a card with their name on it and can make purchases, they are not legally responsible for the debt incurred on the account. The primary cardholder retains full legal liability for all charges and payments. Most, but not all, credit card issuers report the account history, including payment activity, credit limit, and balance, to the major credit bureaus for the authorized user.
The Impact on a Child’s Credit Profile
When a child is added as an authorized user, the primary cardholder’s account activity can translate into entries on the child’s credit report. Consistent on-time payments by the primary cardholder can positively contribute to the child’s credit score. A long credit history from an established primary account can also add to the child’s average age of accounts, a factor in credit scoring models. Furthermore, if the primary account maintains low credit utilization—the percentage of available credit being used—this favorable ratio can be reflected on the authorized user’s report. These positive factors can help to establish a credit history for the child.
Conversely, negative actions by the primary cardholder can also appear on the authorized user’s credit profile. Late payments, high credit utilization, or account defaults by the primary cardholder will negatively impact the child’s credit score. A single missed payment can have a significant adverse effect, remaining on the credit report for several years. While the authorized user is not legally obligated to pay the debt, these negative marks can still lower their credit score.
Key Decisions Before Adding a Child
Before adding a child as an authorized user, careful consideration of the primary cardholder’s credit habits is important. The primary cardholder should have a history of excellent financial management, including consistent on-time payments and low credit utilization. This responsible behavior directly impacts the authorized user’s credit profile. It is also important to assess the child’s understanding of how credit functions, even if they will not be making purchases. Setting clear expectations about responsible financial conduct can be beneficial.
Parents should regularly monitor the account activity to ensure responsible usage and identify any potential issues early. Not all card issuers report authorized user activity to all three major credit bureaus. Verifying with the specific issuer that authorized user activity is reported to the credit bureaus is important for the arrangement to effectively build credit.
Other Avenues for Building Credit
Beyond authorized user status, several alternative methods exist for individuals to build an independent credit history. Secured credit cards require a refundable security deposit, which typically serves as the credit limit. These cards allow individuals to demonstrate responsible payment behavior, with activity often reported to credit bureaus. Many secured cards review accounts after a period, such as seven months, for conversion to an unsecured card and return of the deposit.
Student loans, particularly federal ones, can also contribute to a credit history when repaid responsibly. They are a type of installment loan, and on-time payments are recorded, positively influencing payment history and credit mix. Credit-builder loans offer another structured approach, where an individual makes fixed payments into a savings account or certificate of deposit, with the funds released at the end of the loan term. These payments are reported to credit bureaus, establishing a positive payment history.
Once an individual reaches legal age and has a source of income, they can apply for their own credit card as a primary cardholder. Starting with a card that has a low credit limit and consistently making on-time, full payments can effectively build a strong credit profile.