Building Your Child's Credit History

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As back-to-school season is wrapping up, many parents have equipped their kids with the supplies they will need for the upcoming year. However, many have likely forgot to pack a tool their child may be in desperate need of -- a credit card. Young adults between the ages of 16 and 20 are often not eligible to receive a credit card of their own. However, their parents or guardians can make them part of their existing credit accounts. This carries a number of advantages for the student, including giving them an early leg-up on building up their credit score, as well as beginning their financial education around credit and debt.

Set up your child as an authorized user. While the main account holder of the credit card must be at least 21 years old, you can add teenagers as authorized users. This means you can start teaching your child about credit cards, and help them build out their credit history at the same time. To add an authorized user to your account, simply call your issuer's customer service line. They will mail a card with the new user's name printed on it. You will still receive a single bill, with all the charges from both credit cards appearing on it. You can typically add up to 5 users per account. For most cards, these new users will not cost you anything extra, however, you should double check with your financial institution beforehand to make sure.

If possible, make that authorized user on a business credit card account. You don't actually need to be a small business owner to apply for a business credit card. With these credit cards you can get extra rewards on purchases at office supply stores, such as Office Depot and Staples - brands which you may already be shopping at for back-to-school items. The other great thing about adding your child as an authorized user on a business card is making use of all the managerial functionality. Since authorized users are typically "employees", the best business credit cards give the main account holder the ability to do things like set maximum allowable spending on the account, and get purchase alerts.

Risks go one-way for authorized users. If you were to miss a payment or fall on hard financial times, your child's credit history would not be affected permanently. If something bad were to happen to the account they are an authorized user on, they can simply request to have their name taken off it. This will effectively undo any negative marks on their score. On the flip-side, as noted above, if your child does something foolish with the account, and put up a charge you cannot afford to pay, your finances will be at stake. Not only will you be liable for all the purchases they made, but if you fail to make the necessary payments, it will be reflected on your credit history as if you were the one who made those purchases - you have complete ownership of the account and all the debts within it.

Why Does Doing This Matter?

In today's world, your child needs a credit score in order to carry out many basic functions, such as getting a job or apartment. According to a study by the Consumer Financial Protection Bureau, over 20% of people between the ages of 25 and 29 do not have a credit score. One in five of individuals in this age group will, therefore, struggle to get loans, if they ever need one. By setting up your son or daughter as an authorized user, you will be making sure they do not become a member of this "credit invisible" group.

While your child may already have a full schedule of classes, adding "credit cards 101" may serve as both an educational tool, and a vehicle to a more stable financial future.