How to Build Your Child’s Credit: Actionable Steps

Establishing a positive credit history is a step toward achieving financial stability. Credit is a record of how an individual manages borrowed funds. A favorable credit history can unlock various opportunities, such as securing housing, obtaining loans for educational pursuits or vehicle purchases, and eventually acquiring a home. Building credit early provides a foundation for these financial milestones.

Leveraging Existing Accounts for Credit Building

Parents can utilize their established credit to assist their child in building a credit history. One method involves adding a child as an authorized user on an existing credit card account. As a user, the child receives a card linked to the parent’s account, though the primary account holder retains full responsibility for all charges and payments. This arrangement can benefit the child’s credit history if the primary account is managed responsibly, with on-time payments and low credit utilization, as this activity is reported to major credit bureaus.

To add a child as an authorized user, the primary cardholder contacts their credit card issuer through their online portal, mobile app, or by phone. Information includes the child’s name, date of birth, and Social Security Number. The primary cardholder should confirm with the issuer that authorized user activity is reported to the major credit bureaus—Equifax, Experian, and TransUnion. Some card issuers may have a minimum age requirement, such as 13 years old, for authorized users.

Another approach is opening a joint credit account with a child. Unlike an authorized user arrangement, a joint account means both parties share equal responsibility for the account’s management and any debt incurred. This option contributes to credit building. The process involves both individuals applying together, providing personal and financial information. Both parties are legally obligated to repay the debt.

Initiating Independent Credit Accounts

Once a young adult reaches the age of majority, 18 years old in most states, they can begin establishing credit in their own name. A secured credit card is a starting point for individuals with limited or no credit history. This type of card requires a cash deposit, which serves as collateral for the credit line and matches the credit limit. For instance, a deposit of $200 results in a $200 credit limit.

Secured credit cards function similarly to traditional credit cards for making purchases, but the upfront deposit reduces the risk for the issuer, making them more accessible. To apply for a secured card, a young adult needs to be at least 18 years old, provide their Social Security Number, and show proof of income. The application process involves completing an online form or applying in person, followed by submitting the security deposit, which can range from $50 to $500 or more depending on the desired credit limit and issuer. Consistent, on-time payments on a secured card are reported to credit bureaus, which helps build a positive credit history.

Another tool for building independent credit is a credit-builder loan. This type of loan operates in reverse compared to traditional loans: the funds are not disbursed to the borrower upfront. Instead, the loan amount, ranging from $300 to $1,000, is held by the lender in a locked savings account or certificate of deposit (CD) while the borrower makes regular monthly payments over a set term, 6 to 24 months. Once all payments, including interest (which can range from 6% to 16% APR), are completed, the borrower receives the full loan amount, minus any fees, such as application fees around $10 to $25.

The primary purpose of a credit-builder loan is to establish a positive payment history, as the lender reports these on-time payments to the major credit bureaus. Application requirements include providing proof of income to demonstrate the ability to make payments. This method offers a structured way to demonstrate financial responsibility and build a credit profile, as it contributes to the individual’s credit mix and payment history.

Ongoing Credit Management for Young Adults

Once credit accounts are established, managing them responsibly is necessary for maintaining and improving credit health. Making all payments on time is the most influential factor in building a strong credit history. Late payments can significantly harm a credit score and remain on a credit report for an extended period. Setting up payment reminders or automatic payments can help ensure timely remittances.

Another important aspect is managing credit utilization, which refers to the amount of revolving credit used compared to the total available credit. This is calculated by dividing the total outstanding balances by the total credit limits across all revolving accounts. Keeping credit utilization low, below 30%, is advised to positively impact credit scores. The length of credit history also plays a role, with older accounts in good standing benefiting credit scores, accounting for 15% to 20% of a credit score. A diverse mix of credit types, such as credit cards and installment loans, can also contribute positively to a credit profile.

Regularly monitoring credit reports is a practice for young adults. A credit report is a detailed summary of an individual’s credit activity and current credit situation, compiled by credit bureaus. It contains information such as account types, credit limits, payment history, and the age of accounts. Individuals are entitled by federal law to one free credit report every 12 months from each of the three major nationwide credit bureaus: Equifax, Experian, and TransUnion. These reports can be accessed at AnnualCreditReport.com.

When reviewing a credit report, check for accuracy, completeness, and any signs of potential errors or fraudulent activity. Identifying and disputing inaccuracies is a right under federal law. While the credit report provides the raw data, a credit score is a numerical representation derived from this information, used by lenders to assess creditworthiness. Understanding the contents of one’s credit report empowers individuals to manage their financial standing effectively.