The main reason for this is that most children and young adults have limited credit-building options. If your child is among them, you may ask, “Can I build my kid’s credit score?”
This guide explains why your child may struggle to establish their credit profile and how you can help. You’ll learn about the benefits and potential pitfalls of common solutions so that you can find the most effective one.
Why Children Can’t Build Credit
To start a credit profile, you need a financial product like a loan or credit card. Getting one as an adult typically isn’t a problem, but your child will likely find it hard to borrow from an average bank.
If they’re a minor, they can’t do it independently at all. Minors lack the legal capacity needed to enforce a loan agreement, which means they can’t enter one as a primary account holder. Even after your child reaches legal age (typically 18), lenders might be unable to work with them for at least a few more years.
This is mainly because of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009. It prohibits banks from issuing a credit card to anyone under 21 unless they meet one of the two conditions:
- Demonstrating an ability to make payments independently
- Having a co-signer who is 21 (or older) and can guarantee for the card
The good news is that the CARD Act doesn’t impact all financial products or completely prevent children from building credit. With parents’ help, children can establish remarkable credit profiles that will open many doors throughout adulthood.
How To Build Your Child’s Credit Score
Source: Mikhail Nilov
There are several methods parents often resort to when building children’s credit profiles:
- Co-signing loans
- Helping them get a secured credit card
- Adding them as authorized users of their credit cards
Before committing to any of these options, you should weigh their pros and cons because each carries certain risks.
Should You Co-Sign on a Child’s Loan?
If your child is a legal adult, you can co-sign on different types of loans, most notably:
- Personal loans
- Car loans
- Private student loans
As a co-signer, you guarantee the loan by claiming to repay it if your child doesn’t. You don’t get access to the funds or can control the child’s spending—you only assume responsibility for the debt and let your child leverage your credit to improve their chances of being approved.
With this in mind, co-signing on a loan can be a risky move, especially if your child doesn’t have adequate financial education or healthy spending habits. You’d have to put your credit and money on the line, which is a decision that requires careful consideration.
You’d also have to find a lender that allows co-signing and is willing to work with young adults with a limited credit history. Not every bank is willing to take on such a risk, so you might have to do some thorough research.
If you find such a lender, your child’s loan will kick-start their credit, and the credit bureau will open a file in their name. Irresponsible behavior can put both your profiles at risk, so make sure your child understands the importance of proper credit hygiene.
How To Help Your Child Get a Secured Credit Card
If you want to support your child’s credit without risking yours, a secured credit card could be a more suitable option. It requires a security deposit that typically serves as a credit limit, which lowers the lender’s risk and makes the card available to people without a strong credit profile.
This is another solution reserved for young adults, as minors can’t apply for secured cards. If your child is of legal age, you can help them get one by making the down payment or encouraging them to save up for it. Keep in mind that a secured card carries the same obligations as a regular one, so you should prepare your child by teaching them all about it.
The main drawback of secured cards is the cost of using them. Most come with a high annual percentage rate (APR), so your child may spend a significant amount of money on interest. This can make it hard to repay the outstanding balance and increase the chances of your child damaging their credit profile.
Is Adding a Child as an Authorized User of Your Credit Card a Good Idea?
Source: Karolina Grabowska
As minors can’t obtain loans or credit cards, some parents try to build their children’s credit by adding them as authorized users of their cards. This way, the child gets a credit file in their name before they can start one independently.
The problem is, not all lenders report authorized users’ activity to credit bureaus. If your bank doesn’t support this option, adding your child won’t have any impact on their credit. Even if it does, this method can be risky for several reasons:
- Your child inherits your credit history, including all potential red flags—If your report shows any late payments, extensive credit use, or other problems, they’ll all show up on the child’s profile
- Many lenders give authorized users unrestricted access to the credit card—Without an option to limit your child’s spending, you expose yourself to a risk of significant debt
- The child doesn’t build an independent credit profile by being an authorized user (they only piggyback on yours)—When you remove your child from the card, all history associated with it gets deleted from their profile
Minors often don’t have sufficient financial awareness and responsibility to be entrusted with a credit card. The risks of adding your child as an authorized user outweigh the benefits, especially since there’s no long-term positive impact on their credit profile.
To eliminate these issues and let parents support their children’s independence, Austin Capital Bank created FreeKick—the safest way to establish and grow your child’s credit profile.
FreeKick—Credit Building Made Safe and Easy
FreeKick combines a Federal Deposit Insurance Corporation-insured (FDIC-insured) deposit account with additional services to build and monitor your child’s credit profile.
With FreeKick, you don’t need to risk your credit or personal budget to support your child’s financial future—all you have to do is:
- Make a Deposit—Sign up at FreeKick.bank and choose a plan based on the deposit amount you’re comfortable with
- Set It and Forget It—Once you open the account, FreeKick will build 12 months of credit history for your child
- Keep Growing—After 12 months, you can renew the account for another term to keep building your child’s credit or cancel it and receive 100% of your deposit back
Monthly subscriptions are annoying and burdensome, so FreeKick offers a free plan with a one-time deposit of $2,500 and two other options with lower deposit amounts and small annual fees:
If your child is between 14 and 25 years old, FreeKick will establish a credit history in their name. The child’s credit activity will be reported to the three major consumer credit bureaus as soon as they reach legal age. If your child is already a legal adult in your state, reporting will start when you open the account.
You can cancel the account at any point without penalties, and your deposit will be returned to the account it came from. Note that credit bureaus only accept reporting for adults, so if you close the account while your child is still a minor, no credit can ever be reported for that account.
FreeKick’s Credit Profile Monitoring for Additional Peace of Mind
Regular credit profile monitoring is crucial to staying on track and proactively eliminating any errors on the report. Any issues on the child’s profile may call for changes in their spending behavior so that they can keep improving their score.
To take monitoring off your hands, FreeKick includes services that come free with your account.
Such services also reduce the risk of a dangerous crime many children have fallen victim to—synthetic identity fraud. The following comparison explains how this crime differs from typical identity theft:
|Fraud Type||How It Works|
|Identity theft||The perpetrator steals the victim’s personal information and impersonates them to defraud the lender|
|Synthetic identity fraud||The fraudster combines real information—like a child’s Social Security Number (SSN)—with a fake name, address, and other details to create a new identity and obtain credit|
To help your child enjoy a more financially stable future and have their credit profile monitored by experts, sign up for FreeKick.
Featured image source: Ivan Samkov