The Best and Worst Way to Help Your Child Establish Credit
As a parent you work hard to help each of your children succeed, or at least teach them the skills to do so. You actively participate in their education through parent-teacher conferences, tutoring, homework, and countless study sessions. You enroll them in sports programs to help them stay healthy and learn how to improve their athletic abilities through teamwork. You work hard to set them up for success in every possible area of life.
Of course, if you truly want your child to enter adulthood with the best possible chance for success then don’t overlook the importance of helping your child to establish good credit. Having good credit will make it easier for your child to begin his journey into financial independence. The condition of your child’s credit is going to matter when he applies for his first apartment or individual insurance policy, when he tries to purchase his first vehicle or home and, yes, even possibly when he applies for his first job. Poor credit or even a lack of sufficient credit could make hitting these milestones much more difficult than they need to be for your young adult.
Thankfully, there are some things which you can do as a parent to help your child establish credit before she leaves the nest. Take care, however, that you do not make the mistake of putting your own credit health in jeopardy in order to achieve this goal. There are smart strategies, and some not-so-smart strategies.
The Authorized User Method…the best
One of the easiest and safest ways to help her establish credit is to add her as an authorized user onto an existing credit card account. When you add your child as an authorized user her name is added on your account. Afterwards, the account with all of its payment history will typically be added to her credit reports within a few months
The authorized user method, unlike co-signing, is also safer for you as the primary account holder. As the primary account holder, you will still personally receive the monthly statements and you will still be in charge of the monthly payments. In fact, you do not even have to physically hand over a card to your child unless you believe she is responsible enough to be trusted with charging privileges.
There are a few facts you should keep in mind concerning authorized user accounts. First, if the account has any negative factors associated with it (i.e. late payments or a high balance) then the account could potentially harm your child’s credit scores instead of helping. Second, whenever you pick the account (or accounts) to which you want to add your child remember, the older the account the better.
Finally, most but not all authorized user accounts will appear on credit reports. You should check with your credit card issuer to see if they will actively report account history on the authorized user’s credit reports as well as your own. The authorized user method is how my parents help me build credit. It worked 30 years ago, and it still works today.
Why Co-Signing Is Dangerous…and just a horrible idea!
Although the temptation to help your child by co-signing can be strong, the truth is that co-signing is extremely dangerous. When you co-sign for a credit card or any other type of account you are accepting full responsibility for the debt as if it were your own. There is no difference. The account will show up on your personal credit reports and can make it difficult for you to qualify for new financing in the future, even if your co-signer manages the account responsibly.
In the worst circumstances, your child might not properly manage the account for which you co-signed. When this occurs your credit reports could become cluttered with high balances, late payments, and other derogatory information, all of which can quickly send your credit scores in a downward spiral. And no, you can’t simply hide behind, “but I was just the co-signer.” That doesn’t work.