How to Start Building Your Kid’s Credit History

By Bethany Hickey

It takes time to build a good credit score, and it’s more than just bragging rights. A good credit score opens up more borrowing opportunities and increases your chances of qualifying for lower interest rates. Although it can take time to build, parents can help establish a positive credit history for their kids well before they turn 18.

3 ways to establish your kid’s credit history

Although children can’t take out loans or get a credit card by themselves, here are three ways you can help them build credit history.

1. Add your kid as an authorized user on your credit card

This method gives parents a lot of control and requires very little work.

An authorized user is someone who is added to an existing credit card by the card’s primary cardholder. In a nutshell, you’re giving your kid access to your credit line. You can give your child their own credit card that’s tied to the account or just add them to the account without giving them a physical card. You’ll have full control over the account and be solely responsible for making the payments. 

Once added, your kid gains credit history from being an authorized user on the card. It can take at least 30 days before the card shows up on their credit reports. This means positive and negative reporting actions from the card are added to their credit reports, starting from when they were added. Just make sure you stay on top of payments, because missed payments can hurt their credit, too.

Some credit cards have age requirements for authorized users, usually starting at age 13. If you have a younger child, consider cards without age requirements for authorized users.

2. Kid credit-building loans

Credit-building loans are designed to help low-credit borrowers establish or improve their credit history. These loans are often considered opposite to traditional loans in that you don’t get any money upfront and they don’t charge interest. 

Credit-builder loans are more like deposit accounts that require monthly contributions that are reported to the credit bureaus. Once the loan term is over, you get access to the funds.

There are credit-building loan providers that allow you to open one up on your child’s behalf so they can benefit from the timely payments. One example is FreeKick, offering credit-builder loans designed for kids aged 14 to 25, with terms of up to 12 months that can be renewed each year. Parents open the account on the child’s behalf and make a one-time deposit. The deposit is used to make the credit-builder loan payments, which get reported to the major credit bureaus.

3. Credit-building kid banking apps

Some kids’ banking apps offer credit-building opportunities. For example, Step is a free kids’ banking app with a secured credit card that can be set up with an adult who acts as a sponsor to the account if the child is under 18.

When your child uses the Step card to make a purchase, Step removes that amount from the kid’s Step Spending deposit account. Kids can only spend up to what they have in their deposit account, making it a safer alternative to traditional credit cards.

Kids’ banking apps with credit-building features typically require you to opt in to credit reporting. With Step, once children turn 18 years old and decide to opt in, the last two years of their credit history is reported.

After they’re 18, you can still help out

Once your child enters adulthood, they can take out loans and get their own credit cards to build their own credit history. But just because they’re an adult, it doesn’t mean they have to be completely on their own — you can still offer help in other ways.

For example, many young borrowers ask parents and guardians to cosign on loans to increase approval odds. This means as a cosigner, your credit score is what’s used to meet the lender’s credit score requirements and determine interest rates. Cosigners aren’t responsible for making monthly payments — that’s the primary borrower’s job — but they do act as a backup payer. So even if you couldn’t build their credit history before adulthood, you can still offer help when they’re just starting out. 

If you don’t want to cosign, you could help out by offering guidance on how to save up for down payments, how amortization works and what makes up their credit score. Financial literacy is a big topic, so starting early can mean covering more topics over time and really help prepare them.

Start your kids out on the right foot

It’s reported that 16% of consumers have very poor credit, falling within the FICO credit score range between 300 and 579. A credit score that low can mean getting turned away for loans or high interest rates, which raises the cost of borrowing. Young adults are more likely to fall in the 500 range due to a lacking credit history.

But parents can give their children a headstart by helping them establish a positive credit history and showing them the ropes before they enter adulthood.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.