A credit card can be a great tool to help your child build credit for the first time. However, depending on your child’s age and financial situation, they might not be able to qualify for this type of financing on their own.
As a parent, if you’re willing to co-sign it might help your son or daughter open a credit card account in their name. Yet there are some significant drawbacks to consider where co-signing is concerned, along with some alternative ways to help your child instead.
What Is Co-Signing?
When you co-sign for a credit card, you apply to open a new account with someone else. In many cases, your good credit history and credit score may help your loved one qualify for a credit card that they might not be eligible to open otherwise.
For a child under the age of 21 years old, a co-signer is required unless your son or daughter can prove their own source of income. This rule was put into effect in 2009 with the passage of the Credit Card Accountability Responsibility and Disclosure Act (aka the Credit CARD Act).
Before you put your name down on a joint credit card application with a child, you should know what to expect. As a co-signer you will be:
- Potentially liable for the debt
- Likely to see the account show up on your credit reports
- Responsible if the primary account holder doesn’t pay as agreed
The Risks of Co-Signing
It’s understandable, even admirable, to want to make life easier on your child when it comes to establishing credit. And if you have good credit, co-signing could indeed be a successful way to help your child qualify for their first credit cards. Yet co-signing involves some considerable risks as well.
- You might experience credit damage. Most co-signed credit cards will appear on the credit reports of both the primary and secondary cardholder. So if your child ever pays their account late, both of your credit scores might go down. Even if your child pays on time each month, a high credit utilization rate could have a negative impact on your credit score anyway.
- The card issuer might not notify you about account changes. As a co-signer, you might not always be in the loop about the activity or changes on a credit card account. For example, a small initial credit limit could increase in the future—putting you on the hook for a lot more potential debt than you expected when you helped your child open the account. Furthermore, you might not even be aware that the account is past due until you notice a late payment on a credit report or receive a call from a debt collector.
Alternatives to Co-Signing
The good news is that you don’t have to put your own credit at risk to help give your child a head start in the credit-building department. The three strategies below represent alternative ways to help your child establish credit without co-signing.
1. Secured Credit Cards
It can be difficult for someone with zero credit history to qualify for certain types of credit cards. Yet there are ways to establish credit from scratch that don’t involve using a co-signer.
A secured credit card could be a good fit for someone who wants to build credit for the first time. However, for your child to use this approach a few details will need to be in order.
Your child will need to:
- Be 21 years or older OR
- Be 18 years old with an independent source of income
Additionally, opening a secured credit card requires a security deposit. The size of this deposit (i.e., $300, $500, etc.) often equals the credit limit on the account.
If you help your child open a secured credit card (perhaps by loaning or giving them the security deposit funds), it’s important to make sure that the credit card company will report to all three credit bureaus. Then, it’s essential for your child to manage the credit card responsibly—keeping their credit utilization rate low and paying on time every month.
2. Student Credit Cards
Even with little to no prior credit history, your child might qualify to open a student credit card. Many student credit cards are unsecured credit card options—accounts that you can open without a security deposit.
The credit limits on student credit cards tend to be on the lower side. And as far as credit card rewards go, student credit cards may be somewhat limited. But if your child opens this type of account and uses it wisely, it could help them build good credit that opens the door to better credit card options in the future.
Again, your child will need to be at least 21 years of age (or 18 years old with independent income) to open a student credit card in their name. Otherwise they would need a co-signer to be eligible for the account thanks to the CARD Act.
3. Authorized User Status
A third way to help your child establish credit with a credit card is to add them as an authorized user onto your account. When your child becomes an authorized user on your credit card, the card issuer may report the account and its associated payment history to the three major credit bureaus. (Note: Credit reporting policy for authorized users can vary among credit card companies.)
As far as age restrictions go with authorized user accounts, those decisions are up to the individual card issuers. American Express, for example, requires authorized users to be at least 13 years old. Chase, on the other hand, will let you add a child of any age as an authorized user on your account.
Before you add your child to your credit card, make sure you’ve managed the account well in the past. If you put your child’s name onto a credit card with late payment history or high credit utilization numbers, his or her credit score might go down rather than improve.
It’s wonderful to give your child the gift of building good credit if you have the means to do so. But co-signing isn’t the only strategy with the potential to help you achieve this goal.
Consider alternative options before you decide to open a joint account with anyone. And if you do decide to co-sign for your child make sure to shop around for the best credit card offers and then check your credit report every month to keep an eye on the account.