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Resources > Education Center > Can a Child Build a Credit Score if I Co-Sign on an Auto Loan? [Answered]

Can a Child Build a Credit Score if I Co-Sign on an Auto Loan? [Answered]

Whether your child is looking for more freedom or it’s time for a new family car, you’ll likely finance your new vehicle through a loan. This can also serve as a good opportunity for your child to start their credit profile if they meet the necessary requirements.

So, if you’re wondering, “Can a child build a credit score if I co-sign on an auto loan?” this article will give you the answers you’re looking for. You’ll also learn whether co-signing on a car loan is a smart financial move in the first place.

How Does Co-Signing a Car Loan Work?

To obtain any loan, you typically need to check two boxes:

  1. A stable income
  2. Good credit 

A regular income shows that you have the means to repay the loan, while your credit profile predicts the likelihood of doing it timely and without delinquencies. 

Those who can’t meet these conditions have to find a co-signer who will vouch for them. The co-signer agrees to repay the loan if the primary account holder doesn’t, assuming full responsibility for the debt.

While any financially stable adult can be a co-signer, in most cases, it’s a family member or a close friend. The question is, can it be your child?

Can a Child Co-Sign on My Car To Build Credit?

A co-signer is the person guaranteeing a loan, so it will most likely be the parent who co-signs the child’s loan, not vice versa. This is because most children and young adults can’t get a loan independently or vouch for another borrower due to a lack of sufficient income or credit history.

Note that co-signing a child’s loan is only possible if they’re a legal adult (18 and over in most states). Minors can’t enter loan agreements because they don’t have the legal capacity necessary to make the contract enforceable. 

If your child is of legal age and gets approved for a loan with you as a co-signer, both of you can use the loan to build credit profiles. As the primary account holder, your child will build a credit history that will be reported to credit bureaus and used to define their credit score. The problem is, a co-signed loan can also backfire and damage both your profiles.

The Risk of Co-Signing on a Child’s Car Loan

Source: Antoni Shkraba

If you co-sign a loan with your child, and they fail to meet their obligations toward the lender, credit bureaus will consider this your mistake as well. Any defaults or other red flags will be recorded on your credit profile, damaging your chances of getting future loans.

The only way around this is to fulfill your role as a co-signer and make payments instead of your child. Children refusing or being unable to repay the loan isn’t unheard of, so you may end up hurting your personal budget unless you’re certain your child will stay responsible.

To mitigate this risk, take the following steps before co-signing a loan with your child:

  1. Educate your child on borrowing money wisely
  2. Assess your budget
  3. Explore exit strategies

Teach Your Child About Loans

Children can be impulsive and make decisions that aren’t in their best interest to get what they want. This is why it’s crucial to have open conversations about money before getting them (and yourself) involved in a loan.

Let them know that getting approved for the loan and buying a car is only the first step, and the hard part comes afterward. They should be ready to commit to responsible financial habits and prioritize repayments.

You should also teach your child about the basic principles of loans if you haven’t had a chance to do it yet. Make sure they’re familiar with the following:

  • The cost of borrowing money (interest, fees, etc.)
  • The necessary terminology
  • The way loans impact their credit

Determine if Your Budget Can Support Co-Signing

Despite your child’s financial situation and responsibility, you never know if you might have to make good on your guarantee and repay their debt. That’s why you shouldn’t co-sign the loan unless you can finance repayments without overextending your budget.

Stress-test your finances by setting aside the repayment amount and seeing how it impacts your lifestyle and other obligations. It’s also a good idea to have some savings as a buffer for unpleasant surprises. Prepare yourself for any scenario, and you can avoid hurting your credit if your child can’t pay off the loan.

Find Out if You Can Remove Yourself From the Loan

Some lenders may allow co-signers to extricate themselves from the loan after a certain amount of time, even if the loan isn’t paid off fully. There are two ways this can happen:

  • Co-signer release—A co-signer can be released from a loan if the lender deems the primary holder fitting to repay it independently. This may negatively impact the interest rate and other loan terms, though, especially if your credit was the deciding factor in the approval
  • Refinancing—As the loan will help your child establish a credit profile, they may be able to refinance the loan under their name. They’ll enter a new loan agreement independently and won’t need you as a co-signer

Other Ways To Help Your Child Build Credit

Source: Blake Wisz

As a credit-building option, co-signing a car loan may not be the best decision. It requires your child to be of legal age, much like most other financial products that help them establish a credit profile.

Some credit types might be unavailable to your child even after they become legal adults. For example, your child can’t get a credit card before turning 21 unless they meet one of the two conditions imposed by the CARD Act of 2009:

  1. Showing an independent ability to make payments
  2. Having a co-signer over 21 who can be held liable for the debt

Ideally, your child will enter adulthood with good credit instead of waiting for it to start building their profile. So far, the only way to do this has been to add your child as an authorized user of your credit card.

This method suffers from the same issue as co-signing a loan—you have to put your credit and finances on the line. If the child can’t make a payment, you’ll either do it for them or have your credit score damaged by the delinquency.

To help parents set their children up for a more stable future without such dangers, Austin Capital Bank offers FreeKick.

FreeKick Lets Parents Build Children’s Credit Without Risking Theirs

FreeKick is a Federal Deposit Insurance Corporation-insured (FDIC-insured) deposit account combined with additional services, helping you build and monitor your child’s credit profile.

If your child is 14–25 years old, you can start their credit journey in three simple steps:

  1. Create an Account—Go to FreeKick.bank and choose your plan based on a one-time FDIC-insured deposit
  2. Set It and Forget It—When the account is active, FreeKick will automatically build your child’s credit history for 12 months through a no-interest installment loan paid from the deposit. The loan serves purely for credit building and can’t be accessed by anyone, removing the risk of credit damage
  3. Keep Growing—After the 12-month term, you can renew the account for another 12 months or cancel it and get your deposit back

FreeKick offers a free plan with a one-time deposit and two options with a small annual fee and lower deposits to help parents avoid unnecessary monthly subscriptions. See the below table for details:

Deposit AmountPlan
$2,500Free
$1,750$49/Yr
$1,000$99/Yr

If your child is of legal age in your state, FreeKick will immediately report the credit history created for them to the three major consumer credit bureaus, helping them establish a credit profile. A minor’s credit history will be reported once they reach legal age because the bureaus only accept credit reporting for adults.

You can close your account at any time without penalties. Note that if you do it while your child is still a minor, no credit reporting can be done for the account because of the aforementioned limitations. 

Protect Your Child’s Private Information With FreeKick’s Credit Profile Monitoring

Identity theft has affected millions of American families, and children are among the most vulnerable groups. Their Social Security numbers (SSNs) and other information aren’t monitored as closely as adults’, leaving room for an elaborate crime—synthetic identity fraud

Synthetic identities combine a child’s SSN and fake information, letting fraudsters obtain credit and disappear without repaying. The SSN can stay connected to such activity until the crime is resolved, endangering a child’s ability to have a clean credit profile.

Preventing these issues is too big of a task for an average parent, so FreeKick helps with credit monitoring services that come with the account. 

Help your child build credit while keeping their profile clean and their private information safe—create a FreeKick account.

Featured image source: Andrea Piacquadio