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.

Use FreeKick To Build Your Child’s Credit and Protect Their Identity

With so many restrictions on minors obtaining credit cards, a service like FreeKick that provides credit building features is the workaround you need. Offered by Austin Capital Bank, FreeKick is an FDIC-insured deposit account that helps you build credit for your child while also protecting the identities of your whole family.

Three Steps for Using FreeKick’s Credit Building Service

FreeKick’s credit building service is available for children aged 13 to 25. Take the following three simple steps to help your child establish a credit history early on in life:

1. Create an Account—Go to FreeKick.bank, sign up for an account, and choose a deposit that suits your budget
2. Set It and Forget It—FreeKick will start building 12 months’ worth of credit history for your child
3. Keep Growing—After 12 months, you can either close the account without any fees or choose to continue building credit for your child for another year

This service gives your child a credit head start of up to five years when they turn 18, which will help them save $200,000 during their lifetime through favorable loan terms and other financial perks.

How FreeKick Protects Your Child’s Identity

Child identity theft happens every 30 seconds, and without a secure identity, your child’s credit profile will be standing on a shaky foundation. This is why it’s important to invest in identity protection when you’re trying to give your children a bright financial future. FreeKick’s identity protection services include:

Services for Minors	Services for Adult Children and Parents
Credit profile monitoring Social Security number (SSN) monitoring Dark web monitoring for children’s personal information Up to $1 million identity theft insurance Full-service white-glove concierge credit restoration Sex offender monitoring—based on sponsor parent’s address	Credit profile monitoring SSN monitoring Dark web monitoring for personal information Up to $1 million identity theft insurance Full-service white-glove concierge credit restoration Lost wallet protection Court records monitoring Change of address monitoring Non-credit (Payday) loan monitoring Free FICO® Score monthly FICO® Score factors Experian credit report monthly

What FreeKick Costs

FreeKick offers two pricing plans:

FDIC-Insured Deposit	Annual Fee
$3,000	$0 (Free)
No deposit	$149

With both plans, you get:

1. Credit building for six children aged 13 to 25
2. Identity protection for two parents and six children aged 0 to 25

Say goodbye to credit card hassle and help your child establish a good credit profile—sign up for FreeKick today.

Featured image source: Andrea Piacquadio