Starting young: How to build credit for kids

Building credit can be challenging, especially when you don’t have any credit history to speak of. It’s a bit of a catch-22: Lenders want to see a credit history to approve you for credit, but you need credit to build that history. Without a credit history, it can be difficult to qualify for loans, credit cards, or even rental agreements. 

This is why kids often benefit when they have parents who will strategize with them to help build credit. Adding a child as an authorized user on a parent’s credit card is a popular way to start building credit from scratch, making it easier to access financial opportunities in the future. Let’s talk about the ins and outs of this method of building credit.

What is an authorized user?

Simply put, an authorized user is a person established through the account as someone allowed to use another person’s credit card account. The primary cardholder is responsible for all charges made by the authorized user and for paying the bill. This arrangement can help the authorized user build their own credit history by benefiting from the primary cardholder’s good credit habits.

What’s a good age for starting this process?

The appropriate age to add your child as an authorized user varies by card company. Some issuers have no minimum age requirement, while others set it between 13 and 16 years old. However, just because the credit card company approves it, doesn’t necessarily make it the right choice for you and your family.

When deciding, first consider your child’s maturity level, their understanding of financial responsibility, and your ability to monitor their spending. This is a prime teachable moment, and if your child is mature enough to learn from this scenario, it might be a good time to make the switch on your account. (It’s also possible to add them on the account and hold their card until it’s time for them to use it for purchases you’ve pre-approved.)

What are the benefits?

Adding your child as an authorized user can offer several benefits:

• Building credit history: Early exposure to credit can help your child build a credit history, which is beneficial for future financial endeavors like loans and mortgages.
• Financial literacy: This setup provides an opportunity to teach your child about financial responsibility, budgeting, and the importance of managing credit wisely. And ultimately, you’re the one in control of the account!
• Convenience: In emergencies, your child will have access to immediate funds. The key is to discuss beforehand what constitutes an emergency and what does not.

What are the potential risks/downsides?

While there are benefits to setting this up within your credit card account, obviously there are also potential risks involved. Make sure you understand the risks before starting this process with your child.

• Misuse of the card: Your child might misuse the card, leading to high balances and financial strain on you as the primary cardholder. Ultimately, you’re responsible for the account, including its payments.
• Impact on credit: Any negative credit activity on your account can impact your child’s credit, and vice versa.
• Financial dependency: Your child might become reliant on your credit rather than learning to manage their own finances independently. If you think about the situation as training wheels for your child and treat it as such, you can both understand that the ultimate goal is for them to fly solo without assistance eventually.

How do parents teach responsible use?

Teaching responsible credit card use involves several strategies:

• Set clear spending limits: Establish and communicate clear spending limits to your child. As mentioned earlier, it’s within your rights as a parent to hold the card in a safe spot until it’s time to make a transaction, at which point you can hand the card off to them to complete.
• Monitor transactions: Regularly review the account activity together to ensure responsible use.
• Discuss financial concepts: Talk about budgeting, saving, and the consequences of debt. Help them to understand interest, payments, and how to view their balances and other important parts of the account.
• Encourage monthly payments: Emphasize the importance of paying off balances monthly to avoid interest.

By adding your child as an authorized user, you can help them build a strong financial foundation. However, it’s crucial to weigh the benefits against the potential risks and to educate your child about responsible credit use. With the right guidance throughout, this can be a valuable and formative step in their financial journey.