Many young adults graduate high school or college without fully understanding the importance of credit or how to manage it. Building a solid credit history is more than just getting approved for a credit card – it impacts everything from loan applications, signing a lease for an apartment, renting a home, obtaining insurance, employment opportunities, and more.
As a parent, you can give your teen a head start on their financial journey. Helping them establish a strong credit history provides a lasting gift that will pay off for years to come.
Add your teen as an authorized user on your credit card
One effective way to help a young person begin building credit is by adding them as an authorized user on your credit card. This is a simple process where you add your teen to your credit account, allowing them to benefit from your payment history, credit limit, and the time your account has been opened. This does not give your teen access to your full line of credit, but it can help them build a positive credit history.
When they are ready, they can apply for credit in their name, and having a history of being an authorized user can significantly boost their chances of approval. For example, a young adult who is added to a parent’s credit card at an early age may find themselves with a strong credit score when applying for their own credit, making it easier to get approved for loans and credit cards with favorable terms.
However, it’s important to note that not all credit card issuers report authorized users to the credit bureaus, so it’s crucial to check with the card issuer before proceeding. Additionally, some credit card companies have age restrictions or specific policies regarding authorized users, so understanding the details is key.
If you have a less-than-perfect credit history, adding your teen could negatively affect his or her credit. So, before taking this step, ensure your credit report is in good shape. Every family situation is different, and there may be reasons why adding your teen as an authorized user to your account does not make sense or makes you uncomfortable.
Open a student or secured credit card
If your child is age 18 or older and a college student, they can apply for a student credit card. However, student credit cards are unsecured. If your child is under 21, they likely won’t get approved unless they have proof of income, or a parent cosigns.
If your teen doesn’t qualify for a student card, consider a secured credit card. With a secured card, your child will need to make a deposit, which serves as their credit limit. For example, if a secured card requires a $1,000 deposit, the maximum amount a user can charge to the card is $1,000. This is a great way to start building credit without the risk of overspending. Generally, the deposit is refunded to the user when the account is closed or converted to an unsecured card, assuming the balance has been paid in full.
Consider a credit-builder loan
Geared toward building credit rather than borrowing money, some lenders offer credit-builder loans. Like traditional loans, credit-builder loans require monthly payments, but instead of your teen receiving the money upfront, the lender holds the borrowed amount in a savings or certificate of deposit account while the payments are made. Your child may have to pay interest, but some lenders may return all or a portion of the interest once the loan has been fully paid. Although your child is not borrowing money, payments are typically reported to the credit bureaus – helping your child build credit and savings at the same time.
No matter which method you choose, the most important factor in building a solid credit history is ensuring that payments are made on time and in full. If your teen is not yet ready to manage credit responsibly, it may be better to wait until they are. Remember, building good credit takes time and discipline, and can profoundly impact their financial future. Remember, giving the gift of credit is a smart investment in a young adult’s lifelong financial well-being.
Whether you’re a client or not, we’re here to help guide you and your adult in building strong credit. For more information, let’s talk.
