As a parent, you should always look out for the health and safety of your children. However, this includes their financial health as well. Teaching them how to manage their finances and maintain their credit score will have a huge impact on their future. If you help them establish good habits early and explain which factors will affect their score, it will make it much easier when they become independent. Not only will it become easier to obtain loans when they need them, but also to find and rent housing. So, if you are looking for ways to give them a boost into adulthood, here’s how you can help minors and young adults build credit.
Do Minors Have a Credit Score?
In most cases, minors don’t have a credit score because they have no credit history. If you take a moment to think about this, it should make complete sense. Since you can’t legally enter into contracts until you’re 18, minors can’t get approved for credit accounts.
However, there are some instances where a minor may have a credit score. For example, if the credit agencies mistakenly created a profile in their name, there will be a record of them in the system. Also, if someone stole your child’s identity and used it to open credit accounts, they could have a dismal credit history before they even become an adult. But, you can also help minors build a credit history if they are an authorized user on an adult’s account.
How Can Minors Build Credit Before They Turn 18?
For parents who want to help their children have a strong financial start in life, you can help them build credit before they turn 18. If you feel they are responsible enough, you can make them an authorized user on your credit card account. You will remain the primary account holder, retain authorization for access to the account, and full responsibility for all transactions. However, your children will benefit from your repayment habits and credit history. Although it doesn’t have the same impact as being the primary account holder, it gives minors a way to establish a credit history before they need one. Before you add them though, you will want to check with your credit card company to ensure they report the activity of all users on the account to the credit bureaus. Otherwise, it will not be an effective way to build credit.
Another option is to make your child an authorized user without giving them a physical card. This way, they receive all the benefits without the risk of overspending on the account. Although some credit card companies don’t have a minimum age limit, those who do typically require a minimum age between 13 and 15 for cardholders.
When Can Minors Start to Build Credit?
So, when can minors start building their credit history? The answer to this question really depends on the parent. If your child is responsible and you trust that they won’t abuse the privilege of having a credit card, you can make them an authorized user at any time. Or, you can add them to the account, and give them the physical card when you feel they are ready.
Even if you decide to wait until they become an adult in the eyes of the law, there are still things you can do to help them establish credit once they turn 18. One of the most common things parents do is cosign for a loan or credit card of their own.
Student Credit Cards
Student credit cards are specifically designed to help people start building credit. They work just like any other credit card. However, they typically have much lower credit limits and offer no incentives. While you don’t have to be a student to obtain one, you must meet their eligibility requirements.
Secured Credit Cards
Secured credit cards are another popular option for people trying to repair or build credit. You must pay a deposit, usually equivalent to your credit limit, in order to qualify. Using it to make small purchases and pay them off every month will help you establish a good repayment history. As long as you pay on time, the company will return the deposit when you switch to a standard credit card.
Although they go by many names, credit-builder loans work much like secured credit cards. Also known as “Starting Over” or “Fresh Start” loans, these types of loans will require you to hold the amount you borrow in an account while you pay it off. While you won’t be able to access the money until you pay off the loan, it will report your payments and help you boost your credit rating. Not only will it help you raise your credit score, but also qualify for better interest rates on future loans.
Unfortunately, if you are already struggling with your own credit score, consigning for another credit account may not be the best option. Another way to quickly build credit is to report bill payments for telecom and utilities. Some companies and landlords will offer the service for free. However, others may charge a small fee. If you pay all the monthly bills on time, it can add several transactions that show a strong pattern of debt repayment. On the other hand, any delinquencies will hurt your credit score.
Begin with a Strong Financial Education
You may decide it is best to wait until your child turns 18. But, you can still teach them responsible financial habits and how to live within their means. This includes showing them how to create and follow a budget, establishing good savings and spending habits, and explaining factors that will affect their credit.
If your kids understand the basics about borrowing and repaying debts, they will have a much stronger start in life. And since they have time on their side, they can start early and begin building a strong credit history.
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