How to give your kid a good credit score
Someday, your kid's credit score will be his or hers alone. But in the meantime, if you want to give her a running start, there are things you can do to make sure those all-important digits start high, so your kid will work to maintain the scores rather than to build credit from scratch, which can be difficult. Happily, there are some ways to do that without putting your entire credit line at risk in case of a little youthful, reckless behavior.
Always, your first task is to continue to educate your child about how to use credit as a financial tool — one that, like any other, can be misused with disastrous results. You can use everyday occurrences to teach kids about credit, says credit score expert Barry Paperno.
"For example, when using a card in a restaurant, explain the chain of events (the restaurant gets the money for our meal from the bank, the bank sends me a bill each month, I pay the bill) and the consequences of paying versus not paying on time, both in terms of cost (finance and late charges) and credit rating/score, as well as the future difficulty of obtaining a credit card, renting an apartment or financing a car."
But with information only, and no experience actually handling a credit card, managing the temptation to overspend or paying the bill, your child doesn't know how to manage credit any more than a student driver knows how to drive after studying a driver's manual. The real learning comes from doing.
Being added as an authorized user is one way people can establish credit, and young people seeking credit are often advised to ask their parents to add them as an authorized user. That means the child can use the card to make purchases, but is not responsible for repayment. If you're considering that, it's a good idea to clearly communicate expectations about how and when the card may be used and to establish spending limits — and to be prepared to rescind privileges if rules are not followed.
If your only goal is to establish a good score, "adding her as an authorized user to a 'seasoned' existing account with a good payment history and maintaining a low (25% or less) utilization percentage will probably provide the quickest bang for your buck credit score-wise," Paperno said in an email.
But that puts your credit at risk, all the way up to your credit limit, and some parents may be reluctant to do that. If you are going purely for a high score, the option that carries the least risk for parents is to add your child as an authorized user without giving him the plastic or even the credit card number.
Keep reading for some other ways to build good credit for your kid, such as getting a secured credit card.
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