As your child reaches their teens, they should start thinking about their future. Credit building is an important part of it because a strong profile can open many doors, so you’ll want to get your child interested in it as soon as possible.
This task might be somewhat challenging—you’ll have to cover several topics that aren’t particularly digestible to children. To give you a helping hand, this guide will clarify what credit scores are and what kids should know about them. You’ll learn how to explain credit in a simple, engaging way that will encourage your child to build a strong profile.
Credit Score—Definition for Kids
While the underlying mechanism of a credit score is complex, the general principle is easy to explain to your child—it’s a three-digit number that shows how responsible a person is with money.
It’s best to focus on the FICO® scoring model, as it’s the most popular one. Explain to your child that their credit activity will be reported to the credit bureau, which will assign a score ranging from 300 to 850. Scores are grouped into five categories, each assigned a specific descriptive rating:
By the time you explain credit to your child, they’ll have already encountered some form of scoring in school, so you can tell them a credit score isn’t much different—it reflects their responsibility and changes in their spending habits. Smart financial management means a higher score, which can benefit them in numerous ways.
Advantages of a High Credit Score
The best way to get your child interested in credit building is to explain how it can make their life easier. Any purchase involving borrowed funds will require a solid credit profile.
If your child is still young, you can use an example they can relate to, like buying a new phone in installments. If they’re ready to consider larger life milestones, you should emphasize that a strong credit profile can help them:
- Buy a car
- Get a job
- Take out loans at favorable terms
- Rent or buy an apartment
When your child sees that healthy credit habits can pay off, they’ll be more motivated to develop them. With this mindset, it’s time to teach them what those habits look like.
What Impacts Your Child’s Credit Score?
The FICO scoring model uses five factors to determine a credit score, each having a specific percentage value reflecting its impact on the score. FICO Score 8—the most commonly used model—relies on the following factor weights:
|Factor||Credit Score Impact|
|Amount owed/Credit utilization||30%|
|Credit history length||15%|
How To Explain FICO Score Factors to a Child
Optimizing FICO Score factors calls for sensible spending and smart decisions. You can explain each factor and corresponding behavior as follows:
- Payment history—A record of past credit payments showing if they were missed, late, or made on time. To ensure a clean credit history, they should make repayments no later than 29 days from the due date. Explain to your child that this factor has the most impact on their credit score
- Amount owed/Credit utilization—The amount owed is how much you owe each lender individually and in aggregate (total). Credit utilization is how much of your credit limit you are using, expressed as a percentage—e.g., $300 used of a $1,000 credit limit is 30% utilization. Credit card utilization below 30% is good, but below 10% is ideal
- Credit history length—The age of all credit accounts on the report. The best way to maximize credit history length is to open the first credit account as early as possible
- New credit—Encompasses new credit accounts and hard inquiries. Both should be kept to a minimum, as excessive accounts or inquiries signify an inability to manage current accounts effectively
- Credit mix—The diversity of a credit portfolio. Managing several credit types (e.g., installment and revolving accounts) without issues is a sign of responsibility and high financial awareness
The above concepts shouldn’t be hard to explain—it all comes down to only asking for credit when you need it and using the borrowed funds when there’s no better alternative. Help your child understand that credit should be used as a last resort, and they shouldn’t have trouble maximizing their score.
A bigger concern is how they’ll get access to credit in the first place, as children’s options aren’t particularly abundant.
How Can Your Child Start Building a Credit Score?
According to the Pew Research Center’s survey, 64% of parents believe their children should be financially independent by 22. Still, only 24% of young adults enjoy such independence. Most children rely on their parents for financial support, which goes beyond receiving an allowance.
Parents typically play an active role in their children’s credit scores in the beginning because credit products aren’t easily accessible to them. Because of the CARD Act of 2009, young adults under 21 can only get a credit card if they demonstrate an independent ability to make payments. If not, they need a financially independent co-signer over 21 who will share the account ownership.
A secured card might be more accessible because it puts less risk on the lender. The way it works is quite simple:
- Your child pays a security deposit
- The bank issues a credit card with the limit typically being the same as the deposit
- The child uses the secured card as any regular credit card
The downside of secured cards is that they often come with a high annual percentage rate (APR). You should explain to your child that the APR makes a significant difference, as it’s the cost of using credit funds. A high APR means higher payments, so it may be harder to repay the debt.
How To Help Your Child Maximize Their Credit Score
Source: Andrea Piacquadio
As discussed above, credit history length impacts your child’s credit score, so starting early can be a significant advantage. Minors can’t get credit products, so many parents decide to add children to their credit cards as authorized users.
Doing so would give your child a credit profile before they could start their own. They’ll inherit your score, and your credit files will stay connected. While this seems like a shortcut to your child’s credit profile, it can be dangerous for several reasons:
- Your child will have access to your credit card, but they won’t be held accountable for the debt. If they misuse the card, you most likely won’t be able to dispute any purchases as you willingly made them authorized to use your card
- If you or the child miss or make late payments, both credit profiles will be negatively impacted
- When you remove your child from the card, all credit history associated with it will be deleted from their report, so they’ll be back to the beginning
With the above in mind, adding a child to your card might not be the best idea. If you need a simpler, more effective way to help your child build credit, FreeKick can help.
FreeKick—Credit Profile Building for Children and Young Adults
Powered by Austin Capital Bank, FreeKick is a combination of a Federal Deposit Insurance Corporation-insured (FDIC-insured) deposit account and credit building and monitoring services.
You can create an account in three steps:
- Make a Deposit—Choose a plan based on a one-time FDIC-insured deposit with a 12-month commitment
- Set It and Forget It—When you open the account, FreeKick automatically builds 12 months of credit history for your child
- Keep Growing—When the 12-month term ends, you can keep building your child’s credit or close the account and receive your deposit back
You can choose from three plans based on the deposit amount:
- Free—One-time deposit of $2,500
- $49 per year—One-time deposit of $1,750
- $99 per year—One-time deposit of $1,000
If your child is a legal adult (18 or over in most states), FreeKick will start reporting their credit history to the three major consumer credit bureaus. FreeKick can also build a credit history for minors (ages 14–17), but they need to go through a quick process to activate credit reporting when they reach legal age, as credit bureaus only accept it for adults.
Regardless of your child’s age, starting a credit journey early in life can pay off handsomely—a strong credit profile can help them save over $200,000 later in life.
You can close your FreeKick account at any point without penalties. Note that if you do it while your child is still a minor, no credit history can be reported for the account because of the aforementioned regulations.
FreeKick’s Advanced Credit Profile Monitoring
Besides helping your child build a credit profile, FreeKick can also monitor it to keep their sensitive information safe. This is important because children are among the most common targets of identity fraud.
Minors’ identities typically aren’t monitored, which makes them appealing to financial criminals who use them for synthetic identity fraud. They combine a child’s Social Security number (SSN) with a fake name and other details to create a new identity and scam lenders.
If you want to go beyond financial education and help your child secure a strong credit profile while keeping their information safe, sign up for FreeKick.
Featured image source: Julia M Cameron