How to Help Your Child Build Credit Effectively

Building credit early is crucial for young individuals, influencing future opportunities like housing, loans, and insurance rates. A positive credit history leads to more favorable financial terms.

Laying the Groundwork for Credit

A credit score, such as a FICO Score, serves as a numerical representation of an individual’s creditworthiness, typically ranging from 300 to 850. Lenders use this score to assess the likelihood of an individual repaying debts on time.

Several key factors influence this score:
Payment history (35%)
Amounts owed (30%)
Length of credit history (15%)
New credit (10%)
Credit mix (10%)

Individuals must be at least 18 to obtain credit. Those under 21 often need independent income or a co-signer for an unsecured credit card.

Credit bureaus (Equifax, Experian, TransUnion) track and report credit history. They compile detailed reports on bill payments, loans, and debt. Lenders use these reports to evaluate financial behavior, forming the basis of credit scores.

Practical Approaches to Building Credit

Authorized User

Becoming an authorized user on a parent’s credit card is a common starting point. The authorized user can make purchases, but the primary cardholder is responsible for payments. This helps build credit if the issuer reports activity and the primary account is managed responsibly (on-time payments, low utilization).

To add an authorized user, the primary cardholder typically needs to provide the individual’s full name, date of birth, and often their Social Security Number and address. This process can usually be initiated by contacting the credit card issuer online, through their mobile app, or by phone. While many issuers allow this for free, some premium cards may charge an annual fee for authorized users, ranging from tens to hundreds of dollars.

Secured Credit Cards

Secured credit cards are ideal for those with little credit history. They require a cash deposit, typically $200-$500, which acts as collateral and often matches the credit limit. This reduces lender risk, making them easier to obtain than unsecured cards. Payment activity is reported to major credit bureaus.

Applicants must be at least 18 and provide identification, income details, and bank account information for the deposit. These cards are available from banks, credit unions, and online issuers, with applications often online.

Student Credit Cards

Student credit cards are designed for college students and are easier to qualify for. Eligibility requires enrollment in higher education and being at least 18. Applicants under 21 need proof of independent income, such as from a job or allowances. Applications require student ID, proof of enrollment, and income details, and are available from major banks and online lenders.

Credit Builder Loans

Credit builder loans help establish credit while saving money. The borrowed amount is held by the lender in a locked savings account or CD. Individuals make regular monthly payments, typically 6 to 24 months. Payments are reported to credit bureaus, and the original loan amount is released upon full repayment.

Applicants need identification, bank account details, and income or employment information. These loans are offered by credit unions, community banks, and online lenders.

Nurturing a Strong Credit Profile

Regular monitoring of credit reports is important to maintain and enhance a credit profile. Individuals are entitled to a free copy of their credit report once every 12 months from each of the three major credit bureaus—Equifax, Experian, and TransUnion—through AnnualCreditReport.com. It is also possible to get free weekly credit reports from each bureau through this site. When reviewing a credit report, it is important to check for accuracy in personal information, account details, and payment history. This includes looking for unauthorized accounts, incorrect late payments, or errors in account balances.

If inaccuracies are found, dispute them directly with the credit bureau or the company that provided the information. Provide supporting documentation. Bureaus are required to investigate disputes, usually within 30 days.

Credit scores fluctuate with ongoing credit activity. Practicing responsible credit habits is key. Consistently paying bills on time is the most impactful factor for a positive score. Payment reminders or automatic payments can help ensure timely remittances.

Keep credit utilization low, meaning the amount of revolving credit used compared to total available credit. Experts recommend keeping this ratio below 30%. Paying down balances before the statement date helps maintain low utilization. Avoid opening too many new credit accounts simultaneously, as each application can temporarily lower a score.