You need a good credit score to get a credit card, but you need a credit history to have good credit. This catch-22 of personal finance can be challenging for young people who want to start building their credit history, and parents who want to set their children up on strong financial footing.
But while some card issuers will give a card to someone as young as 10 or 11, that doesn’t mean it’s a good fit for your family.
What’s a parent to do if they want to give their kid’s credit a boost without wreaking havoc on the family finances?
There are two key questions to ask yourself if you’re considering adding a child as an authorised user, said Rod Griffin, director of public education at Experian. First, is your child ready? “Are they at a level of maturity to understand what credit is and what the responsibilities are?” Second, are you ready? “There’s a level of responsibility for you, too,” Griffin warned, “And a level of risk that’s associated with anyone who’s an authorised user.”
When someone is an authorised user on a credit card, they can make purchases, but are not responsible for making payments; the primary cardholder is on the hook for the balance. The main benefit of adding your child to your card, beyond teaching them healthy financial habits, is to allow them to piggyback off the length of time you’ve held that card. The longer you’ve had the card, the longer their credit history will look to the three credit bureaus, and the higher score their score will be.
If you think your child is ready to use credit, it’s not enough to say, “Oh, by the way, we’re going to give you a credit card,” as they leave for college at 17 or 18, Griffin said. If you add a child to your credit card as an authorised user, you should be ready to spend time with them to review the principles of healthy credit use and your family’s own rules.
“Sit down at the end of the month, walk through the billing statement for that card and teach them that if you make a minimum payment, it will take you potentially decades to pay off that debt and cost a lot of money,” Griffin recommended.
Beth Kobliner, author of Make Your Kid a Money Genius (Even If You’re Not) and Get a Financial Life, agreed. “A poorly managed account will hurt everyone’s credit. Make sure you set out clear rules for how the card can be used, and stress that this arrangement is not permanent,” she said.
If you want to avoid the risk of your child getting too comfortable with your credit card, establish a time limit that they’ll be an authorised user. Howard Dvorkin, CPA and chairman of Debt.com, helped his own college-age kids research the best credit cards for college students and encouraged them to apply for their own cards after two years on his own cards. The hardest part, he said, was getting them to switch over to using their own cards rather than keep using the safety net of his.
There’s a common misconception that you should make your child an authorised user as early as possible to protect their identity. But that’s no longer necessary, Griffin said. He said in the past, parents would make their child an authorised user to establish a credit file for that child, then freeze their credit for security. But it’s easier than ever to freeze someone’s credit, and it’s now a free service.
“A parent can request that we create a credit file and freeze it for a minor, and we will do that at no cost,” Griffin said of Experian’s policy. TransUnion allows parents and guardians to freeze credit for minors 15 and younger. Equifax allows parents to do it for minors under 16; if you’re 16 or 17, you can request it yourself.
While a credit freeze prevents new credit from being opened in your name, it doesn’t prevent someone from accessing your card information and taking over your account, Griffin warned. If you make your child an authorised user, then freeze their credit, they (and you) will still need to keep the card and account information secure.
If you want to teach your kids about money and they’re tweens or early teens, stick with cash instead of credit, said Kobliner. “It makes money real to kids,” she said. “It also invites them to learn about trade-offs and making choices. You have a finite amount to spend—say, a $20 bill—and once you spend it, it’s gone.”