How to Build Your Child’s Credit History
Set your child up for financial success by learning how to responsibly build and protect their credit history from an early age.
Building a strong financial foundation is a valuable gift parents can offer their children, and establishing a positive credit history early can play an important role in their future financial success. Credit, in simple terms, is a record of how reliably an individual borrows and repays money. A robust credit history and score can open doors to favorable interest rates on loans for education or housing, easier approval for rental agreements, and even impact employment opportunities. Understanding how to responsibly initiate and manage a child’s credit profile can provide them with a significant advantage as they transition into adulthood.
Authorized User Accounts
One of the most accessible methods for a parent to help a child establish a credit history involves adding them as an authorized user on an existing credit card account. An authorized user receives a card linked to the primary cardholder’s account, allowing them to make purchases. While the authorized user can use the card, the primary cardholder retains sole legal and financial responsibility for all charges and the overall debt.
For this method to be effective, the credit card issuer must report the authorized user’s activity to the major credit bureaus: Equifax, Experian, and TransUnion. Consistent, positive payment history by the primary cardholder can then reflect positively on the authorized user’s credit file. To add a child as an authorized user, parents typically need to provide the child’s full legal name, date of birth, and sometimes their Social Security Number (SSN).
Before adding a child, ensure the primary cardholder’s account has a history of timely payments and responsible credit utilization. Any negative activity, such as late payments or high balances, could adversely affect the authorized user’s developing credit. Some issuers may require the child to be at least 13 or 15 years old. The process usually involves contacting the credit card issuer directly, either through their online banking portal or by calling customer service.
Other Early Credit Building Options
As a child matures, typically reaching their late teens or early adulthood, other credit-building avenues become available, requiring them to take on more direct financial responsibility. These options can further strengthen their credit profile beyond authorized user status.
Secured Credit Cards
Secured credit cards represent a common starting point for individuals with limited or no credit history. To obtain a secured card, a security deposit is required, which typically serves as the credit limit. This deposit minimizes risk for the issuer, making these cards easier to qualify for.
A young adult must be at least 18 years old to open a credit card account independently. If they are under 21, the Credit CARD Act requires them to demonstrate sufficient independent income or have a co-signer. Required documentation for application includes proof of identity, proof of income, and their Social Security Number.
Student Loans
Student loans, both federal and private, contribute to an individual’s credit history once repayment begins. These installment loans are reported to credit bureaus, and consistent, on-time payments can build a positive payment history. Student loans can also enhance the length of credit history and diversify the credit mix. Federal parent PLUS loans affect the parent’s credit, not the student’s, as the parent is the borrower. Missed or late payments on any student loan can damage a credit score and remain on a credit report for up to seven years.
Credit-Builder Loans
Credit-builder loans offer another structured way to establish credit, particularly for those with thin credit files. Unlike traditional loans where funds are disbursed upfront, with a credit-builder loan, the lender holds the loan amount in a locked savings account or CD. The borrower then makes regular monthly payments. These payments are reported to the credit bureaus, and once the loan is fully repaid, the borrower receives the saved funds. This mechanism allows individuals to demonstrate responsible payment behavior while simultaneously building savings.
Monitoring and Safeguarding Your Child’s Credit
Once efforts to establish a child’s credit history are underway, monitoring and safeguarding protect their financial identity. Parents must contact each of the three major credit bureaus—Equifax, Experian, and TransUnion—directly to check a child’s credit report. They will need to provide documentation including the child’s birth certificate, Social Security card, and the parent’s government-issued identification to verify their relationship and identity.
Upon reviewing a child’s credit report, parents should look for any unrecognized accounts, unauthorized credit inquiries, or collection notices. These could indicate potential identity theft. Even receiving pre-approved credit card offers in a child’s name can be a red flag.
Safeguarding personal information is important for prevention. This includes securely storing documents containing the child’s Social Security Number, birth certificate, and other personally identifiable information. Shredding old documents before disposal also reduces risk.
Placing a credit freeze on a child’s credit report is an effective preventative measure, as it restricts access to their credit file, making it more difficult for fraudsters to open new accounts. This process involves contacting each of the three credit bureaus separately. If any errors or fraudulent activity are discovered, act quickly. Parents should dispute inaccurate information directly with the credit bureaus and the companies involved, providing supporting documentation. Reporting the incident to the Federal Trade Commission (FTC) and filing a police report can also be necessary steps to address identity theft.