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A high credit score can significantly improve your financial situation — from qualifying for a loan to lower interest rates and other financial opportunities. If you are a parent, teaching your children how to handle credit responsibly is critical to helping them build a healthy financial foundation for later in life. Here are a few options to help your child build credit early and manage money responsibly.
1. Add Your Child as an Authorized User on Your Credit Card
One of the easiest ways for your child to start building credit is to add them as an authorized user on your credit card as long as they meet your credit card issuer’s age requirement. Your child will have a card linked to your account as an authorized user. While authorized users can use the credit card just like the primary cardholder, they have no legal liability to pay off the debt.
Some credit card companies report authorized user activity to the credit bureaus, such as credit limit, the amount of credit used, and payment history. If no payments are missed, and the card is used responsibly, the authorized user could raise their credit score while learning good credit habits. However, missed payments or maxing out the credit card could have a negative impact.
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2. Your Child Can Secure a Credit Builder Loan ($300 - $1,000)
Another option to help your child build their credit is with a credit builder loan. A credit builder loan usually doesn’t require any credit history, as they’re specifically designed to help build credit. Credit builder loans can give your child the opportunity to prove that they can consistently make timely payments.
The lender deposits a small loan, usually between $300 and $1,000, into a savings account that’s paid back over six to 24 months. These payments are reported to the credit bureaus and held as collateral until the loan is paid in full. At the end of the loan term, your child can access the full loan amount.
Credit builder loans only help if payments are made on time every month. If a payment is missed or late, then the lender could report this to the credit agencies.
3. Co-sign on a Loan
Being a co-signer on a loan can also help your child build a credit history. Even if you’re making all of the payments, it will still appear on their credit report. However, some lenders may not accept a minor as a borrower, even with a parent as a co-signer on the loan.
While co-signing on a loan can potentially help your child improve their credit score, it comes with risks. Once you sign the contract, you’re legally responsible for the entire loan amount if your child cannot pay.
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4. Help Your Child Choose a Starter Credit Card
If your child is at least 18 years old, they can get their own credit card to start building credit. It requires a lender to run a credit check, so if their credit history is sparse, it may limit their options when it comes to cards. Your child may have better luck getting approved for a secured credit card or a student credit card.
Because cardholders are required to make a small security deposit with the lender, secured credit cards usually have more lenient requirements. If the card is used responsibly, then the deposit is refunded. Student credit cards also come with flexible qualification requirements, but they typically come with lower credit limits until it's proven that they are responsible cardholders. But, they will also need to show proof of income to the age 21
5. Teach Them How to Better Manage Their Finances
Financial education is essential when preparing your child for life and helping them build a solid credit score. Teaching money management skills and financial literacy as early as possible, whether at the grocery store or by putting money into a savings account, helps ensure that these habits become a part of your child’s daily life.