Building Your Kids’ Credit: A Creative New Year’s Resolution

Christmas has come and gone, and now we’re approaching the New Year. ‘Tis the season for making resolutions that you can hopefully stick to.

Some of you may be making a New Year's Resolution to make progress in your finances. Others may have a resolution to help your children be in a better position and set them up for future financial success. Which brings us to today’s blog topic. A unique way of helping your children: building their credit.

This is a creative way to help your children without actually setting aside money for them to use in the future.

Why would you want to do this?

  1. Potential for low-interest rates: with a high credit score, your children may be eligible for lower interest rates on loans. This can result in significant savings over the life of a loan like a mortgage or auto loan.
  2. Approval for Rental Housing: Landlords often check credit scores as part of the rental application process. Having a good credit score can increase the chances of being approved for rental housing.
  3. Insurance Premiums: In some cases, insurance companies use credit scores to determine premiums for auto and homeowners’ insurance. A higher credit score may result in lower insurance premiums.

To sum it up, by building your kids’ credit early, you can help them enter the real world in a position to save hundreds, maybe thousands annually, at a time when they are most vulnerable financially. Additionally, you can use this as a time to teach them smart money habits.

There are two ways to implement this:

  1. You can simply open a credit card for them. You will want to utilize a minimal amount and pay off the entire balance monthly. This strategy carries some noteworthy risks, however. Your child could go on a spending spree and if they can’t pay off the balance, you would be on the hook for paying it off or risk damaging their credit. Also, it could develop bad habits by teaching them to utilize a credit card for expenses, which could equate to credit card debt in the future. For these reasons, I hesitate on this strategy.
  2. Rather, I prefer the strategy of adding your child as an authorized user on your credit card. You have the option of telling them about this and giving them access to use the card or not; that’s a matter of parenting style. Again, you could run the risk of a spending spree. This is where the education part comes into play significantly.

Something you’ll want to consider if you’re thinking about adding your child as an authorized user is how responsible you are at managing your credit and what your credit history is. If you’re in a poor spot financially right now by consistently carrying credit card debt or if you have a bad credit history, you may want to focus on bettering your situation before improving your children’s.

Many credit card companies have age requirements for adding an authorized user to a credit card as well. For example, as of June of 2023, companies such as American Express and US Bank have an age requirement of 13, while Capital One, Chase, and Citi do not have a minimum age requirement.

As we embark on a new year, consider this as a meaningful investment in your children’s future well-being. While this approach carries certain risks, proper education, and communication can mitigate these concerns. The potential benefits not only position your children for financial stability but also offer them valuable lessons that will serve them well in adulthood.

I hope you and your family have a wonderful New Year.

Ryan Brueck, CFP®

P.S. If you want to…

  • Spend more time doing the things you love
  • Spend less time worrying about your financial future
  • Feel confident you’re capitalizing on opportunities while minimizing potential threats
  • Experience peace of mind about your financial security

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