Many people don’t think about their credit score until they need to take out a loan. This sometimes leads to unpleasant surprises when they realize they can’t borrow funds at favorable terms—or at all.
That’s why being proactive about credit building is essential to avoiding borrowing issues later in life. As most children don’t concern themselves with such “adult” matters, it’s up to parents to stress the importance of a strong credit profile and provide the necessary support in building it.
This guide will explain the difference that a parent’s involvement can make and show you how to improve your child’s credit score to help them secure a financially sound future.
Why Children Need Parents’ Support When Building Credit
Your child needs a credit history to start and grow their credit score. The problem is that children typically don’t have access to financial products that would let them build it. The CARD Act of 2009 made it virtually impossible for anyone under 21 to own a credit card if they can’t demonstrate an independent ability to make repayments and don’t have a parent with good credit and income to cosign on a card.
While this is a large obstacle to building credit as a young adult, it’s not the only one. A lack of interest is another significant issue. You’ll likely have a difficult time getting your children excited about topics like credit scores and the costs of not having good credit.
That’s why parents have two important jobs in this matter:
- Educating their children on the importance of a strong credit profile
- Actively participating in improving their score
The rest of this guide will focus on actionable tips covering both areas so that you can give your child the much-needed head start in building a strong credit score.
How To Build a Child’s Credit Score—Six Tips To Follow
When your child is ready to start their credit journey, there are several ways you can help them:
- Emphasize the benefits of a good credit score
- Explain how credit building works
- Assess their spending habits and demonstrate good credit behavior
- Help them save up and take out financial products available to them
- Help your child establish and build a credit profile
- Monitor your child’s credit
Show Your Child How a Good Credit Score Makes Their Life Easier
A credit profile and its implications might seem too abstract to many kids, especially early teens. You should teach your children that there are tangible benefits to working on their credit scores.
Let your children know they’ll need good credit for many purchases, like a cell phone or a car. If they start caring about their credit profile early in life, they will be more likely to obtain the loans they want in the future without issues.
It’s also worth pointing out that good credit can help your child beyond obtaining favorable loans. They might need it to get their dream job, as employers in many industries check candidates’ credit reports.
Your child’s living situation may also depend on their credit. Even if it might be too early to discuss mortgages or moving out in general, you should at least plant the idea in their head. Explain that landlords and lenders always prioritize those with good credit, so a good credit score can help them rent or buy their desired home when the time comes.
An issue closer to home for most teens is the cost of obtaining and maintaining a car. You can show them how good credit can allow them to obtain a car loan and save thousands of dollars in interest as well as pay lower vehicle insurance premiums.
You should talk about these benefits before diving into the nitty-gritty of credit scoring. Doing so will help you spark some interest in the matter and instill long-term thinking. When your child sees how a solid credit profile can make their life easier, they’ll pay more attention when you start educating them on building it.
Explain the Basics of Credit Building
By the time your child is ready to learn about credit, the general concept of credit scoring should already be familiar. You can explain that much like teachers grade their work, the credit bureaus—Equifax, Experian, and TransUnion—assess their credit behavior and calculate a score accordingly.
To explain the score your child should aim for, you can give them a breakdown of the FICO® scoring model:
Your child will likely wonder what the score is based on, which might be a more challenging topic as the FICO model encompasses several factors you must consider. The following table offers the simplest way to explain each:
|Payment history||The most important factor, showing if you make payments on time. A clean payment history improves the score by showing that the borrower prioritizes loan payments|
|Amount owed/Credit utilization||For loans, the more money you owe, the lower your score because additional credit may overextend you, which lenders see as a threat. For credit cards, keeping credit utilization below 30% and ideally below 10% demonstrates that you can responsibly manage credit and aren’t financially stressed|
|Credit history length||The total amount of time you have been using credit products like loans and credit cards. The longer your track record of making timely repayments, the more reliable you’ll seem to creditors|
|Credit mix||Different types of credit you use—loans (installment credit) and credit cards (revolving credit). A well-managed diverse mix can increase a credit score because it shows that the borrower can handle several types of credit without issues|
|New credit||The number of new accounts and recent credit inquiries. Too many inquiries or accounts signify poorly-managed existing funds or overspending, which creditors see as risky behavior|
Your child shouldn’t have trouble grasping these concepts with a bit of help. Once they understand them in theory, it’s time to apply what they’ve learned.
Help Your Child Learn Proper Credit Behavior
When your child knows what it takes to build a good credit score, it’s time for them to start developing habits that will maximize it. Children can be impulsive by nature, so you must teach them discipline and responsibility from the get-go.
It’s best to do this before they start using credit, so they can avoid some rookie mistakes. You can let your child practice responsible spending by giving them a prepaid debit card. Fill the card with a specific amount of money and establish some spending rules. You can tell your child:
- How much of the available money they can spend
- What purchases are allowed
- How they’ll be sanctioned if they spend too much or break any rules
This lets you simulate a relationship they’ll have with the bank when they take out a credit card. Any late repayments or similar irresponsible behavior will damage their score, while consistently sensible spending will be rewarded. You can practice this carrot-and-stick approach before your child is ready to take out their own loans or bank cards.
Source: Karolina Grabowska
If you notice any red flags in your child’s spending habits, do your best to correct them before they take out any credit product.
Help Your Child Get Their First Financial Products
If your child is of legal age, they might be eligible for certain ways of building a credit history. A good example is a secured credit card. Unlike a traditional card, it requires a deposit equal to the card’s limit. These are typically smaller amounts (up to $500), so you can help your child save up for the card and open the account.
As the credit card line of credit is secured by the deposit, there’s a lower risk of problems that would damage your child’s score unless they miss or make late payments. They still need to make timely repayments and practice responsible spending, as their credit card activity will impact their credit profile.
Many experts agree that children should start building a credit profile before coming of age. The issue is that options for minors are quite limited, and the traditional ways of supporting them aren’t as effective as advertised.
Find the Right Way To Help Your Child Kick-Start Their Profile
Historically, the most popular method for helping your child build credit has been to add them as an authorized user of your credit card.
This method has been popular because there have been few (if any) other options for building a minor or young adult’s credit, and it comes with several drawbacks. For instance, some banks don’t report the credit activity of minor authorized users at all, while others have specific age limits for doing so. Every bank is different when it comes to reporting—for example, Discover supports reporting for kids 15 or older, and US Bank reports for kids 16 and over.
Besides the possibility of your child’s credit activity not being reported to the bureaus, this approach might not suit you for several reasons:
- You must have a credit card and good credit. If you miss a payment or make a late payment, your child’s credit profile will be negatively impacted
- Your child is not building their own credit, they are piggybacking on your credit
- As an authorized user, your child can legally use your credit card at their discretion
- Your child can harm your finances and credit profile by overspending, increasing your utilization, monthly payment, and interest expense
- When your child is eventually removed as an authorized user, all of your credit history for the card will be removed from their credit profile
- Many lenders ignore authorized user tradelines and credit history when making credit decisions
With the above in mind, you should consider a more effective way to help your child start and build their credit score. You’ll learn about a superior option as soon as we dive into the final bit of advice—keeping track of your child’s credit.
Monitor Your Child’s Credit Profile
It’s crucial to keep track of your child’s profile and encourage them to do the same if they’re a legal adult. If you haven’t checked whether your minor has a credit report, doing so might be a good idea even if they haven’t started building credit.
This is because requesting a credit report is the most effective way to notice the signs of possible identity theft and mitigate its consequences. Children—particularly minors—are vulnerable to synthetic identity theft, where the perpetrator uses information like their Social Security number (SSN) to forge a new identity.
There are two reasons why minors are common targets of synthetic identity theft:
- Their identities aren’t monitored
- In 2011, the government started randomizing SSNs, so they’re no longer tied to information like birth date or location, which would make identifying fraudulent use of their number easier for banks and lenders
Because of this, synthetic identity theft has become one of the main issues in the U.S. payment system. The following diagram from the Federal Reserve’s whitepaper shows how fraudsters create and use fake identities:
Every parent should have peace of mind knowing their children’s identities are safe. If you want to monitor your child’s credit profile and minimize the risk of fraud while helping them build credit the right way, FreeKick can help.
FreeKick—The Simplest Way To Help Your Child Build Credit
To fix the common issues of traditional credit-building methods for minors and young adults, Austin Capital Bank created FreeKick. It combines a Federal Deposit Insurance Corporation-insured (FDIC-insured) deposit account and additional services to help your child establish credit on autopilot.
You can open a FreeKick account in just minutes:
- Bank Deposit—Make a one-time FDIC-insured deposit with a 12-month commitment
- Set It and Forget It—Choose a plan, and your child will automatically build credit for the next 12 months
- Keep Growing—Renew the account for another 12 months and keep building your child’s financial future, or close the account and get 100% of your deposit back
The last thing parents want is another monthly subscription, so FreeKick offers a FREE plan and two plans with smaller deposits and low annual fees:
|FDIC-Insured Deposit Amount||Plan Fee|
How FreeKick Works
When you create a FreeKick account, no further action is required on your part. FreeKick will take it from there and help your child build 12 months of credit history. When the 12-month period is over, you can renew the subscription to let your child build 12 more months of credit history or cancel it and have 100% of the deposit sent back to your bank account.
If your child is a legal adult (typically 18 and up), FreeKick automatically starts building their credit profile and reporting credit to the three major consumer credit bureaus once the account is open.
In case your child is a minor (14 to 17), FreeKick automatically starts building a payment and credit history for them. When they become a legal adult, they go through a simple process to activate credit reporting. Once that’s done, their account is reported to the major credit bureaus, and they start their adult life with up to 48 months of credit history, jumpstarting their personal credit profile and score.
Note that the credit bureaus only accept credit reporting for adults. This means that while you can cancel your FreeKick account at any time without any penalties, no credit reporting can be done if your child is a minor at the time.
Credit Monitoring for Children and Young Adults
As mentioned earlier, credit and identity theft monitoring are crucial for fraud prevention. If you want to keep track of your child’s credit profile, FreeKick is the best way to go about it. The service will take this task off your plate and ensure peace of mind.
If you want to set your child up for a stable financial future, sign up for FreeKick.
When To Start Working on Your Child’s Credit
Even though your child’s credit profile will mostly matter in adulthood, you should start building their score before they reach legal age. Not only will this maximize their credit history length, but you can also help them develop healthy spending and credit habits early on.
Many parents start teaching their children about financial topics like savings, spending, charitable giving, investing, and credit when they become teenagers. Austin Capital Bank estimated that the value of a good credit profile for a young adult over their lifetime is more than $200,000 in cost savings, so getting your children educated and started early by establishing and managing credit responsibly at a young age can brighten their financial future.
Featured image source: Avery Evans