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Credit for kids: How parents can help their child build credit early

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Helping your child build credit at an early age is a valuable gift. Your child may need to have good credit sooner than you realize—whether they’re renting their first apartment, applying for their first car loan or even getting their own cellphone plan.

Before you can help your child build credit early, it’s important to understand how the process works. There are some challenges to consider when building credit for a young person that might not apply to someone who is a bit older. But once you understand how to start building credit for a minor, you could set your child up to enjoy some wonderful benefits in the future.

One way to set your child up for a responsible financial future is by working with Greenlight, a financial education service that issues debit cards for kids and teens. Why is it important to give your child one of the best debit cards for teens? Because debit is a stepping stone to credit, and parents who are teaching financial responsibility to teenagers—or even younger children—can use Greenlight to help their kids learn how to use and manage debit responsibly. That way, when it comes time for you to help your child build credit, you’ll both be prepared for the challenge.

Benefits of building credit early

Your credit score is a three-digit number that helps lenders and other businesses predict whether doing business with you is a good investment. A good credit score tells others that you’re a good credit risk—someone who is likely to repay their debts as agreed.

When you help your child earn a good credit score, many things in their financial life may be easier and more affordable including:

  • Qualifying for financing. Good credit makes it more likely that lenders will approve your child when they apply for loans (i.e., auto loans, private student loans, personal loans, etc.), credit cards and more.
  • Lower interest rates. Having good credit makes it easier for your child to lock in lower interest rates when they borrow money.
  • Lower deposits. Landlords, utility companies, cellphone providers and others may check your child’s credit when they fill out an application for housing or to establish a new service. Good credit makes it more likely for your child to see lower deposit requirements in these situations (and sometimes no deposit requirement at all).
  • Better insurance premiums. Depending on your state of residence, your child might be able to get a lower insurance premium if they have a higher credit score.

Ways to help your child build credit

Helping your child build credit can be complicated for a few reasons. First, a person must be 18 years old to open credit in their own name. Second, your child may need a co-signer to open a credit card before the age of 21 (thanks to the CARD Act of 2009) unless they earn income on their own.

Below are a few ways you may be able to help your child build credit, along with explanations about any age restrictions that may apply.

Add your child as an authorized user

You can add a responsible child as an authorized user on your existing credit card account. This strategy could be a great way to help your son or daughter establish credit history. Many credit card issuers will report account activity to the credit bureaus for primary cardholders and authorized users alike.

As far as credit cards for minors go, adding your child as an authorized user may be your only early credit-building option before your child turns 18. Just keep in mind that some credit card companies may have their own minimum age limits for authorized users.

Help your child open their first credit card

Once your child turns 18, they may be able to open a credit card in their own name—but if they can’t show proof of income that they can use to repay debt, they may need a co-signer. Even teenagers with their own income sources may be declined for a credit card due to a limited (or nonexistent) credit report. Without any previous credit history, some credit card issuers might not be comfortable approving your child for a credit card, especially without a co-signer.

If you’re thinking about how you can help build your child’s credit by co-signing their first credit card, it’s important to understand the risks before you co-sign—including the risk that you won’t be able to find a credit issuer that allows co-signers.

What else can parents do to get a credit card for their kids? If your child is at least 18 years old, here are two possible solutions to the credit-building challenge:

  1. A secured credit card tends to feature more lenient qualification requirements than other types of credit cards. Why? Because cardholders are required to make a small security deposit with the issuing bank (often equal to the credit limit on the account), giving the lender the option to retain the security deposit if the cardholder defaults on their debt. If the cardholder uses their secured card responsibly, their deposit will be refunded, and they may be able to graduate to an unsecured credit card.
  2. A student credit card could also come with more flexible qualification criteria compared with other types of credit cards. Plus, your child shouldn’t have to put down a security deposit to open a student credit card—although they should be prepared for a lower-than-average credit limit until they can prove their ability to use credit responsibly.

Credit builder loan

At the age of 18 (and thereafter), your child may be eligible to open a credit builder loan. As with secured credit cards, lenders that issue these loans may be willing to approve young people who are new to credit—and even those with past credit mistakes.

With a credit builder loan, your child won’t receive the loan proceeds until after they make their final payment—which means that, in addition to its credit-building potential, the account could help your child build savings for a future emergency fund.

How one parent put credit in motion

Laura Spencer, mother of two, put the authorized user credit-building strategy to work in her own family—and the decision led to some wonderful results.

Not only did Spencer add her daughters as authorized users on her credit cards, she used the experience to teach financial responsibility for teenagers. Having struggled with credit card debt herself in the past, Spencer taught her children about compounding interest and why paying off credit card balances each month is so important.

Becoming authorized users (and benefiting from Spencer’s positive payment history on the account) helped both of her daughters in meaningful ways. Her oldest daughter was able to establish more credit on her own and later qualified for a mortgage—purchasing her first home at just 24 years old. Spencer’s youngest daughter built good credit that helped her qualify for a $9,000 auto loan at the age of 19.

When is a good time to help your kids build credit?

It’s wise to help your kids build credit before they leave the nest. If you’re trying to determine whether your child is ready to build credit, ask yourself the following questions.

  • Have I taught my child sound money management basics?
  • Do I trust my child to follow any rules we discuss when it comes to credit cards?
  • Will my child be willing to ask questions when they don’t understand something?
  • Has my child shown an interest in building good credit for the future?
  • Does my child understand important financial concepts like budgeting and differentiating between needs and wants?

If you don’t feel like your child is ready to become an authorized user or open credit in their own name, it may be better to start with some financial education first. Once your son or daughter is more comfortable managing money responsibly, you can revisit the idea of building credit for kids.

How a debit card like Greenlight can be a good start

A debit card, like the ones issued by Greenlight, does not have the ability to help your child establish a credit score. That said, a Greenlight debit card can provide a young person with financial management experience—not to mention the skills involved in tracking purchases, checking balances and planning for the future.

If your child isn’t yet ready to be an authorized user or open a credit card of their own, a debit card might be the perfect fit. Plus, Greenlight’s app allows parents to monitor their child’s spending habits and (if necessary) set limits on certain categories or retailers. These financial tracking tools are especially important for younger children who may be learning how to budget for the first time.

Learning how to use a debit card the right way can help your child build positive financial habits. Then, once you feel like your child is ready for the responsibility, you may want to consider helping your child begin the credit-building process.

The bottom line

Building credit for kids is important, but credit building is just one piece of the puzzle when you’re trying to give your child a financial head start. Parents teaching financial responsibility to teenagers and kids is a critical step in setting a child up for success—and so is setting your child up with one of the best debit cards for kids.

A top financial education service like Greenlight, which teaches children how to use and manage debit cards, can help kids learn important financial skills that could make them better credit consumers in the future.

Written by
Nicole Dieker
Personal Finance Contributor
Nicole Dieker has been a full-time freelance writer since 2012—and a personal finance enthusiast since 2004, when she graduated from college and, looking for financial guidance, found a battered copy of Your Money or Your Life at the public library. In addition to writing for Bankrate, her work has appeared on CreditCards.com, Vox, Lifehacker, Popular Science, The Penny Hoarder, The Simple Dollar and NBC News. Dieker spent five years as writer and editor for The Billfold, a personal finance blog where people had honest conversations about money. Dieker also teaches writing, freelancing and publishing classes and works one-on-one with authors as a developmental editor and copyeditor.
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