Credit history is a vital aspect of your child’s financial journey. It determines whether they’ll be able to secure low-interest rates on student loans in the immediate future. After college, it will continue to impact their ability to secure competitive rates on personal and vehicle loans, credit cards, and mortgages. An individual’s credit history could also impact their job prospects and their ability to rent an apartment.
Because you have to be 18 years of age to qualify for a credit card and most types of loans (which are considered credit-building tools), most students below the age of 18 enter college with no credit history at all. That means it’s not easy for a child to build credit early mainly because age is a limiting factor, but you can help.
According to a report published by Consumerfinance.gov, an estimated 26 million Americans are ‘credit invisible’ – they do not have any credit history. More than 80% of the credit invisible population are 18- to 19-year-olds.
Flickr user CafeCredit.com
The big mistake that most people make is thinking good credit history is not important for an 18-year-old. However, getting a head start on building credit early can make a world of a difference during later years. Helping your child build credit early can start to pay off in terms of securing a low-interest rate on private student loans.
Here are some things you can do to help your child build credit before college.
1. Add Your Child as an Authorized User to Your Credit Card
Adding your child as an authorized user to your credit card is the simplest way to help them get started with building credit. An authorized user is simply a secondary user that you’re adding to your credit card account. You still remain the primary user. Both users can use the card to make purchases, but as the primary user, you’re responsible for paying the credit card bills.
When you add an authorized user to your credit card, credit bureaus record the payment history on both credit reports. So, every time you make a payment, points get added to both credit scores – yours and your child’s. This is the simplest and most straightforward way to help your child build credit before college. There are no legal age limits for adding an authorized user, so you can add them to your card at any age.
Considerations
Before you add your child as an authorized user, know that being added as an authorized user will only help your child if you have a solid credit history/score yourself. If your credit score is poor, this may not be the best option as your child will ‘inherit’ your bad credit history. This will do them more harm than good.
Adding your child as an authorized user at a young age will also benefit them in terms of credit history. Credit history is one of the factors that’s taken into account when calculating an individual’s credit score. A longer credit history can add a few valuable points and boost your child’s score.
Don’t forget to explain to your child the importance of maintaining a low credit utilization ratio. This is another factor that goes into calculating credit scores. Keeping the ratio low helps build credit faster.
Last but not least, both users benefit from the credit card rewards. Most credit card companies allow both, primary and secondary users, to earn points. Some allow the secondary user to spend the points too.
2. Consider Getting Your Child A Secured Credit Card
Trying to get a credit card without credit history is a classic example of a Catch-22 situation. You need a credit card to establish a payment history and build your credit score. However, most credit card companies won’t issue you a card because you need good credit history to qualify. This is where a secured credit card offers a great solution.
A secured credit card works differently from a regular credit card. Regular credit cards have a credit limit set by the credit card company. This is based on your creditworthiness. The stronger your credit, the higher your credit limit is likely to be. With a secured credit card, you deposit money into a bank account and the bank issues you a credit card based on your account balance. The account balance also acts as the credit limit. Your child can charge expenses only up to the amount they have in their account. Once they’ve reached the limit, they can’t charge any more expenses on the card.
How does this help build credit?
When your child pays the credit card bill at the end of the billing cycle, the credit limit gets replenished. Meanwhile, the payment gets reported to the credit bureaus and is reflected on your child’s credit report. Every on-time payment adds a few points to their credit score, building it over time slowly but surely.
As your child’s credit score gets stronger, they can then qualify for a regular credit card of their choice.
3. Help Your Child Get A Credit Builder Loan
Credit builder loans are specially designed to help individuals build credit. These are usually offered by credit unions and very rarely by banks.
With this type of loan, the credit union or lender deposits the loan amount into a locked savings account. These are typically smaller amounts ranging from about $300 to $1,000. Your child pays the amount back in small payments over a period of six months to two years. These payments are reported to credit bureaus, helping your child build their credit score.
Once the loan is repaid in full, the savings account is unlocked and the account holder will receive the full amount back. Credit builder loans offer two significant benefits – you build credit while also building your savings.
4. Get A Retail Store Credit Card For Your Child
While this is not the most ideal option because of the temptation to overspend, it does offer a solution to building credit before college.
Many department stores, retail chains, and even gas stations offer retail store credit cards. These types of credit cards are limited in that they can only be used at that particular chain of stores. However, they are easy to get, which makes them worth exploring. Consistent timely payments on a retail store credit card can help bolster your child’s credit before college.
The downside of retail credit cards is that they usually have high-interest rates. Only consider this option if your child is financially responsible and will make the card payments on time, every month. Even one late payment can damage their credit score, defeating the very purpose of getting the card in the first place.
5. Teach Your Child Good Credit Card Habits
Using a credit card irresponsibly can be an expensive mistake. Help your child avoid these expensive mistakes by teaching them the importance of using their card responsibly.
Some things to focus on:
- The importance of paying all credit card bills in full and on time
- How keeping balances low helps build credit
- The difference between debit cards and credit cards
- How to check their credit report for free
- How to dispute an inaccurate entry in their credit report
- How to budget and track spending
- How to choose the best student credit card while they are in college
All of these are key aspects of how you can help to build and maintain credit for your child. It’s also vital that you teach your child financial literacy. Helping your child get a credit card without explaining how to use it responsibly may be counterproductive in the long run.
| Lender | Rates (APR) | Eligibility | |
|---|---|---|---|
 |
5.99%-16.61%* Variable
4.24%-15.61%* Fixed
|
Undergraduate and Graduate
|
VISIT CITIZENS |
 |
5.37% - 15.70% Variable
3.99% - 15.49% Fixed
|
Undergraduate and Graduate
|
VISIT SALLIE MAE |
 |
5.37% - 17.99% Variable
3.79% - 17.99% Fixed
|
Undergraduate and Graduate
|
VISIT CREDIBLE |
 |
5.98% - 13.74% Variable
3.99% - 12.61% Fixed
|
Undergraduate and Graduate
|
VISIT LENDKEY |
 |
5.99% - 15.85% Variable
3.79% - 15.41% Fixed
|
Undergraduate and Graduate
|
VISIT ASCENT |
 |
3.70% - 8.75% Fixed
|
Undergraduate and Graduate
|
VISIT ISL |
 |
5.62% - 16.85% Variable
4.17% - 16.49% Fixed
|
Undergraduate and Graduate
|
VISIT EARNEST |
|
|
6.00% - 14.22% Variable
4.50% - 14.22% Fixed
|
Undergraduate and Graduate
|
VISIT ELFI |
