As parents, we like to impart our wisdom on our children, gained from years of experience, successes and failures. You may teach your children a sport, pass on your love of music or history. You may take them hiking or fishing. It's natural to share what we are passionate about with our kids, hoping that it may spark a passion in them also. For me, among the passions I'm sharing with my kids is my love of travel and points. So I'm teaching them facts like airplane liveries (the airplane insignias and colors) and what hotel brands belong to which hotels ("See that Sheraton kids, that's a Marriott").
Although I'm (kind of) joking around, one seriously important way we can invest in our kids and help them succeed is to aid in building their credit history at a young age. As you know, credit history and credit score play a pivotal role in being approved for credit cards, mortgages, and other loans. That being said, teaching your kids credit responsibility as well as building their credit from an early age can help them as they get older and need to navigate the lending world on their own. Here are a few ways you can easily and intentionally jump start your children's credit journey so it can help them down the road.
Make them an authorized user
By adding your child as an authorized user on your credit cards, there are multiple positives. First, you can begin establishing their credit at an early age. Banks have various policies about reporting authorized users to the 3 major credit agencies (Equifax, Experian, and TransUnion). By making your child an authorized user, your credit history becomes their history. If you have had a card for 10 years and have paid it on time and have no negative marks, your child now has the same in the eyes on the reporting agencies. Obviously the older the card you make them an authorized user on, the longer their credit history will be. Theoretically, they could have a credit age older than their actual age, depending on how long you've had a card.
How old to be an authorized user?
The CARD Act of 2009 states that you have be 21 years old to have a credit card on your own (or 18 years old with proof of income or a cosigner). The Act doesn't have any restriction, however, on authorized users. Credit card issuers have their own policies though. This chart shows the age each bank requires to add an authorized user. Note they all will report an authorized user's credit to the credit bureaus.
Card issuer | Minimum Age | Report AU |
American Express | 13 | Yes, at age 18 |
Bank of America | None | Yes |
Barclays | 13 | Yes |
Capital One | None | Yes |
Chase | None | Yes, at age 18 |
Citibank | None | Yes |
Discover | 15 | Yes |
US Bank | 16 | Yes, at age 16 |
Wells Fargo | None | Yes, at age 18 |
You can call your bank or perhaps go online to add an authorized user to your account. They will get their own card. The second benefit to making your child an authorized user is you will earn points and rewards on their purchases as opposed to just giving them cash. Note on the chart above that some banks allow minor authorized users but won't report the activity to the credit bureaus until age 18. So with these banks, technically there is no advantage to making your child an AU at age 12 verses 18 other than to earn points, avoid cash, and teach good credit habits.
Speaking of, it's now the disclaimer time of the article when I insist that you consider your child's maturity and responsibility before handing over a credit card, because as an authorized user on your account, you are responsible for paying all of their charges. This can be a time to build good credit habits with your child, but if they tend to think wasting (er, spending) all your money on Crumbl Cookie and Starbucks is a productive use of funds, maybe the authorized user card goes in a drawer till they can handle it more responsibly. In addition, Amex does allow you to put spending limits as low as $200 on an authorized user's card as well as set spending alerts and Barclays has the ability to limit per transaction amounts to avoid large purchases. These features provide some peace of mind to parents wanting their kids to have limited access to their credit.
For your kids under 18, making them an authorized user is really the best way you can help them start their credit journey. As should be the case for anyone, once they turn 18 you can and should access your child's free credit report at places like annualcreditreport.com and creditkarma.com to ensure everything is accurate and address issues with the bank if they haven't reported activity properly.
Other ways to build credit
Builder credit loans
These loans are designed for those over age 18 with little or no credit in order to help them establish such. They do require a level of income in order to make the payments on the loan. You can typically find them offered at credit unions and community banks.
The amount you borrow is held in a bank account while you make payments, so it acts as an investment vehicle, allowing you to access the loan amount plus interest at the end of the term. You should consider interest rates to make sure you are getting the best one as well as make sure your payments are being reported to the credit bureaus, as this is the point of the loan as it pertains to building credit. This can be an option for a teen with a steady income as a vehicle for teaching them about credit, saving, and making monthly payments.
Secured credit card
A secured credit card, which again requires you to be at least 18 years old, functions like any other card, however it requires a deposit put down on the account, typically equal to the credit limit on the card. You make charges and monthly payment as usual, however the bank has mitigated their risk, because if you don't make your payment they can deduct it from your deposit. These cards usually come with low credit limits and can be perfect for the beginner. Some will allow you to upgrade to an unsecured card over time.
These may seem similar to prepaid debit cards like Greenlight, but there are differences. Debit cards are using you own money, while secured credit cards are still using money borrowed from the issuer. Your deposit is just a guarantee of payment in this case. Also, debit cards activity won't be reported to credit bureaus like secured credit cards will, so they aren't helping your child in that area.
Secured credit cards come in fee and no fee versions and are offered by most major banks. Some examples are
Capital One Platinum Secured Credit Card- This card has no annual fee and a $200 minimum deposit that can be paid in installments.
Capital One Quicksilver Secured Credit Card- This no fee card earns 1.5% cash back on all purchases with a $200 minimum deposit.
Discover It Secured Credit Card- This card has no annual fee and 2% cash back on gas stations and restaurants up to $1000/quarter with deposits staring at $200.
Citi Secured Mastercard- This card doesn't offer rewards but has credit limits from $200-$2500.
Conclusion
It really is a shame that personal finance and credit responsibility aren't a regular part of high school curriculums, but as parents we should pick up the slack. Algebra or Chemistry or French are deemed important yet my daughter's knowledge of credit cards is limited to knowing it's a vehicle for getting Macha lemonades into her belly. As part of an overall education of your kids in manners such as spending, saving, and tithing, interest and investments, time value of money, and opening a bank account, understanding how credit cards function and the importance of paying the balance each month should be integral. Although options for beginning to build a credit history really open up once they turn 21 or are 18 with a job, once they meet bank's criteria to be added as an authorized user, this is the best way you can help your kids begin their credit journey.
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