How to Build a Child’s Credit Score
Empower your child's financial journey. Learn how to responsibly establish and manage their credit for a strong, secure future.
Building a strong financial future for a child starts with understanding credit. Establishing credit early offers significant advantages, paving the way for greater financial independence in adulthood. This proactive approach helps ensure a smoother path for major life events that require a reliable financial history.
Establishing a Foundation of Credit Knowledge
A credit score is a three-digit number measuring an individual’s creditworthiness. Lenders use this score to assess the likelihood of loan repayment. General categories influencing this score include payment history, amounts owed, length of credit history, new credit inquiries, and the mix of credit types.
A credit report is a detailed record of a person’s credit activities and financial behavior. It contains information about credit accounts, such as credit cards and loans, and their payment history. This report provides an overview of how an individual has managed financial obligations.
A positive credit history is important for various financial endeavors later in life. A strong credit standing can make it easier for young adults to rent an apartment, secure loans for vehicles or education, and qualify for more favorable interest rates. It demonstrates reliability to lenders and service providers, leading to better financial opportunities.
Utilizing Authorized User Status
Parents can help a child build credit by adding them as an authorized user on an existing credit card account. An authorized user receives a card linked to the primary account holder’s credit line and can make purchases, though the primary account holder remains solely responsible for all payments. This arrangement allows the child’s credit report to reflect the parent’s positive payment history and credit utilization, provided the issuer reports this activity for authorized users.
Parents should carefully consider their own credit history before adding a child as an authorized user. A well-managed account with consistent on-time payments and low credit utilization can positively influence the child’s credit file. Conversely, mismanagement, such as late payments or high balances, could negatively affect the authorized user’s report. Adding an authorized user usually involves contacting the credit card issuer online or by phone.
The account’s history, including payment performance, credit limit, and balance, typically appears on the child’s credit file. It is important to confirm with the issuer whether they report authorized user activity to the major credit bureaus to ensure the child receives the intended credit-building benefits.
Exploring Secured Credit Cards
Secured credit cards offer another avenue for young adults, typically those 18 or older, to establish a credit history. Unlike traditional credit cards, a secured card requires a cash deposit, which often serves as the credit limit. This deposit acts as collateral, reducing lender risk and making these cards more accessible for individuals with limited or no credit history.
Applying for a secured credit card generally involves meeting requirements like being at least 18 and having a Social Security number or Individual Taxpayer Identification Number (ITIN). Applicants typically need a U.S. address and funds for the security deposit, which can range from $200 or more. The approval process is often less stringent than for an unsecured card due to the collateral provided.
Responsible use of a secured credit card builds a positive credit history. This involves making all payments on time and maintaining a low credit utilization ratio, keeping the balance well below the credit limit. Consistent, timely payments are reported to major credit bureaus. Some secured cards may also offer a path to transition to an unsecured card after a period of responsible use, allowing the initial deposit to be returned.
Monitoring and Protecting a Child’s Credit
Regularly checking a child’s credit report is a proactive step in managing their financial identity. While minors typically do not have credit reports, the existence of one could signal potential identity theft. Parents or legal guardians can request a search for a minor’s credit report by contacting the three nationwide credit reporting companies—Equifax, Experian, and TransUnion. For children under 13, requests are usually made by mail and require specific documentation, including the child’s birth certificate and Social Security card, along with parent identification.
When reviewing a credit report, it is important to scrutinize its contents for accuracy. Parents should look for correct personal information, unauthorized accounts, or incorrect payment histories. Discrepancies could indicate an error or identity fraud.
Should any inaccuracies or suspicious activity be identified, prompt action is necessary. Errors can be disputed directly with the credit reporting company (Equifax, Experian, or TransUnion) or the company that provided the incorrect information. Credit bureaus typically have 30 days to investigate disputes and report the results.