How to Build Your Child’s Credit History

Establishing a credit history for your child provides a foundation for their future financial endeavors. A strong credit history is important for adults, influencing access to housing, vehicle financing, and employment opportunities. Building a positive financial track record can unlock better terms on loans and other financial products.

Methods for Initiating a Credit History

Authorized User

One effective way to help a child build credit is by adding them as an authorized user on a parent’s existing credit card account. An authorized user receives a card linked to the primary account, and its activity, including payment history, may be reported to credit bureaus under the authorized user’s name. For this to be beneficial, the parent’s account should have a long history of on-time payments and responsible management.

To add an authorized user, parents need to provide the child’s full name, date of birth, and potentially their Social Security Number (SSN). Credit card issuers allow primary account holders to initiate this process online or by calling customer service. After submission, a card for the authorized user is usually mailed, and credit reporting for the child may begin within a billing cycle or two.

Secured Credit Card

Another strategy involves opening a secured credit card. Unlike traditional credit cards, a secured card requires a cash deposit, which becomes the credit limit for the card. This deposit acts as collateral, reducing risk for the lender and making these cards accessible for individuals with limited or no credit history. Eligibility for a secured card requires the applicant to be at least 18 years old.

When applying for a secured credit card, the child will need to provide identification and documentation, and the initial deposit funds will need to be submitted. Applications can often be completed online. Once approved and the deposit is funded, the card can be activated and used like a standard credit card, with responsible usage being reported to credit bureaus.

Co-signing for a Loan

Co-signing for a loan offers another avenue, typically for older teens or young adults. When an individual co-signs, they agree to assume joint legal responsibility for the debt. If the primary borrower fails to make payments, the co-signer is obligated to repay the loan. This arrangement allows the primary borrower to qualify for financing they might not otherwise obtain due to limited credit history or income.

For a co-signed loan application, both the primary borrower and the co-signer must provide documentation, including income verification and identification. The lender will review both parties’ financial profiles. The application process involves submitting all required forms and documentation, followed by the lender’s review before a decision is made.

Practices for Fostering a Strong Credit Profile

Payment History

Maintaining a positive payment history is important for fostering a strong credit profile. Paying all bills on time directly impacts a credit score, as payment history accounts for a substantial portion of scoring models. Consistent on-time payments demonstrate reliability and a low risk to lenders.

Credit Utilization

Managing credit utilization, the amount of credit used compared to the total available credit, is also important. Keeping this ratio low, ideally below 30%, indicates responsible credit management. For example, if a credit card has a $1,000 limit, keeping the balance below $300 is beneficial.

New Credit Applications

Avoiding an excessive number of new credit applications in a short timeframe helps preserve a credit score. Each application results in a “hard inquiry” on a credit report, which can temporarily lower a score. Spacing out applications allows the credit profile to stabilize.

Length of Credit History

The length of credit history also plays a role in building a strong credit score. A longer history of responsibly managed accounts contributes to a more established and favorable credit profile. While it takes time to build a long history, consistent positive behavior over years showcases financial stability.

Understanding and Reviewing Credit Information

To monitor credit building progress, it is important to understand and regularly review credit information. A credit report is a detailed summary of an individual’s credit history, including payment records, types of accounts, and inquiries. Federal law entitles individuals to a free copy of their credit report once every 12 months from each of the three major credit bureaus—Equifax, Experian, and TransUnion—accessible through AnnualCreditReport.com.

When reviewing a credit report, individuals should examine:

• Personal information
• Account histories
• Credit inquiries
• Any public records

This review helps ensure the accuracy of reported data. A credit score, a numerical representation of creditworthiness, is derived from the information contained within these credit reports, providing lenders with a quick assessment of risk.

Should any inaccuracies be identified on a credit report, it is important to dispute them promptly. This involves contacting the credit bureau reporting the error to explain the discrepancy and provide supporting documentation. Most investigations are resolved within 30 days, leading to correction or removal of incorrect data.