How to help your kids build credit

Parents have a lot of lessons to teach their children — from little things like how to ride a bike or make the bed to big-picture lessons like how to get along with others and contribute to the community.

Many parents also work on teaching their kids financial skills, but that’s easier said than done, especially when it comes to complicated topics like credit. Fortunately, there are plenty of ways to help your kids navigate the world of credit, many of which can be done before your child is even old enough to know what a credit card is. It all starts with parents asking themselves one question: Do I know how to build my child’s credit?

Today’s parents have a lot of options, from adding a child to their credit card to build credit to helping their college student open their first credit card. Let’s take a look at the benefits of building credit for kids, including when you should start helping your children build credit, what to do before your children are old enough for a credit card and how to choose the best credit cards for your kids.

Benefits of building credit for kids

Like it or not, using credit is an important part of adult life. The biggest benefit of building credit for kids at an early age is the fact that — if done right — they’ll have a solid credit history by the time they become an adult.

If you plan on renting an apartment, buying a car, or taking out a mortgage, you need a credit history. Some employers check credit reports as part of the job application process, especially if the job is finance-related. Plus, the better your credit score is, the better interest rates you’ll get on everything from car loans and mortgages to your next credit card. Having good credit could literally save you thousands of dollars — or more — over your lifetime.

However, waiting until your kids are going off to college to have the credit conversation isn’t usually ideal. When you’re thinking about building credit for your kids, it’s a good idea to start the credit-building lessons with the very first piggy bank. That way, your children will have plenty of financial literacy tools in place by the time they are old enough to open their first credit card.

What to do before your children are old enough for a credit card

Building credit for kids can start when they’re relatively young — but there are still a few steps you’ll want to take before your children are old enough to use a credit card on their own. Here’s how to help your children learn the financial skills that will help them manage both their bank accounts and their credit cards responsibly:

Freeze their credit reports

This might seem like an odd place to start, but it can be a good way to provide some protection for your child against identity theft. Thieves will often target people who have little to no credit history — and most children fit that bill.

Sarah Gage, a senior credit cards editor at Bankrate, has already done this for her child. “My son is nine, and one of the first steps I’ve taken to help set him up for financial success has been to freeze his credit reports to protect him from identity theft. It takes a lot of paperwork to do so, but it’s worth it to me.”

Freezing her son’s reports can prevent people from attempting to apply for loans or open new credit cards using his Social Security Number.

To freeze your child’s credit, go to the website of each of the three major credit bureaus — Equifax, Experian and TransUnion — and request a “protected consumer freeze” on their credit record. This type of freeze is specifically for minors, incapacitated adults and spouses, so a parent or guardian should have no issues ordering the freeze for their child.

Start with a savings account

A child’s first savings account often comes in the form of a piggy bank — or multiple, depending on what you think makes sense for them.

A popular method is to set up three piggy banks for your child: one labeled “spend,” one labeled “save” and one labeled “give.” You then teach them the differences between the three and go over some basic rules about how to use them. For example, maybe you give your child $5 a week, and they’re required to put $1 in each jar. The remaining $2 can go in whichever jar they’d like. Or maybe you let them split the $5 however they’d like and just go from there.

Regardless of how you set up their piggy bank (or banks), you should be ready to graduate your child to a real savings account once your child reaches elementary-school age. Many banks have savings accounts specifically designed for children, with the option to deposit your child’s allowance directly into their account and help them set savings goals.

Graduate them to a checking account

Children can make both deposits and withdrawals from a savings account, but by the time they hit middle school, it’s probably time to also add them to a teen checking account — that way, your child can make purchases without having to withdraw money from the bank first.

A savings account tends to reward goal-oriented spending (a child might save up for a special toy, for example). A checking account, on the other hand, is a good way to start teaching your pre-teen good financial habits: When you have the ability to purchase items right away, how do you keep track of how much you’ve spent? Do you need to plan ahead and make sure the money in your checking account lasts until your next allowance payment or birthday check?

Give them a debit card or a prepaid card

You’ll probably want to teach your child how to write a check (it’s still an important life skill!) but you’ll also want to teach them how to pay with plastic. After your child opens their first checking account, setting them up with a debit card is a natural next step. Debit cards allow young people to practice using card readers, withdrawing cash from ATMs and making online purchases — plus, it’s a lot more convenient than a checkbook.

But it’s easy to put too many purchases on a debit card, accidentally overdraw your account and end up paying overdraft fees. If you think that’s going to be an issue for your child, consider turning off overdraft protection so that if your child tries to buy something too expensive, the card will simply get declined.

You can also consider giving your child a prepaid debit card instead. These cards come preloaded with a certain amount of money, so once the money runs out, the child can no longer make purchases until more money is added to the card.

Prepaid cards are often weighed down with fees, however, so be sure to compare your options before choosing a prepaid debit card for your child.

Consider making them an authorized user on your account

Some credit card issuers like American Express and Discover have minimum age requirements when it comes to adding authorized users to your account, but others like Bank of America and Capital One don’t have any at all, meaning you could even add your infant to your account if you really wanted to.

Adding your child as an authorized user to your credit card account means that they’ll be issued a credit card with their name on it — but it doesn’t mean that you have to actually give them the credit card to use. It means that they will be attached to your account and start building positive credit history by association — but only if you use your own credit card responsibly. If you’re comfortable doing this even though your child is still too young to use the card, you can give them a strong head start when it comes to their credit history.

When to give your child their first credit card

After your child feels comfortable using a debit card or prepaid card and is successfully keeping their spending within the limits of their available money, you can start thinking about giving them that first line of credit. This transition generally happens when your child is in their late teens, so don’t feel rushed.

Once you and your child are ready, you can make them an authorized user on your account if you haven’t already and give them their own credit card. This way, your child can start building positive credit history on their own and will have a line of credit available in case of emergencies.

Keep in mind, however, that the timeline for giving them a card is entirely dependent on your financial situation and your child’s preparedness. Some parents wonder whether it’s appropriate to give their child access to a credit card — and in some cases, it’s not.

“As he gets older, I’ll add him to one of my cards as an authorized user,” says Gage about her son. “But for now, I’m more focused on teaching him the fundamentals of good money management.”

It’s up to you to decide whether your child is ready to start using credit and whether you’re in the position to add them as an authorized user to your account in the first place.

Types of credit cards for young adults

If you feel like it’s better for your child to wait until they’re 18 and can open their own credit card, that’s fine, too — you can still prepare them for this step by teaching them good financial habits and by helping them find a card for those with no credit history. You can start by looking into the following types of cards:

Student credit cards

If your teen is enrolling in college soon, you can help them find a student credit card that suits their needs. These cards come with relatively low credit limits and are designed to reward typical college student spending, such as giving cash back for:

• Travel purchases
• Dining and takeout purchases
• Rideshare purchases
• Gas station purchases

Student credit cards are also geared toward those with no credit history, so your teen shouldn’t have much trouble if they were never an authorized user on your account.

Secured credit cards

Secured credit cards are also good ways for young people to build credit. With a secured credit card, your teen would need to put down a security deposit before they are able to use the card. The credit limit on a secured card is generally equal to the deposit. So, if your child makes a $200 deposit, they will receive a secured credit card with a $200 credit limit.

Secured credit cards are good starter cards because they deliberately limit the amount of money your child can charge to the card — so there’s no opportunity to impulse-buy a $2,000 round-trip ticket to Rome, for example. The security deposit also helps protect your child from running up a debt they can’t pay off. Secured credit cards are also designed to help people build their credit and raise their credit score when used responsibly.

4 additional tips to help you continue building your child’s credit

It’s never too early to help your children establish good habits when it comes to building credit and using credit cards. Here are a few tips to consider when taking the next step with your child on their credit journey:

1. Teach your child how to use credit cards

If you’ve been teaching your child good financial habits since the piggy bank days, they should be well-prepared to use credit responsibly. As your child graduates from a savings account to a checking account to a debit card, help them learn how to spend within their means.

If your child makes a financial mistake, such as making an impulse buy that prevents them from having enough money to buy a friend a birthday present, you might be tempted to bail them out and slip them a little extra cash — but keep in mind that some lessons are best learned the hard way. (Plus, your child will learn how to be resourceful; there are lots of ways to give birthday presents that don’t require money).

Credit cards, however, require some specialized education. Make sure your child understands how their use of the credit card can affect their credit score and create debt that’s hard to escape. Teenagers can probably figure out that late payments are a bad move, but they might not know that credit bureaus also look at how high their current balance is — or that higher credit card balances can equal lower credit scores.

When it comes to credit card debt, Gage has already begun teaching her nine-year-old son about the concept.

“We’ve started talking about debt in general terms,” says Gage. “Mainly, the idea that when you borrow money, you often have to pay back more than you initially borrowed. I made mistakes with credit cards when I was younger, and I hope I can help steer him away from doing the same.”

2. Take advantage of your resources

But teaching kids about credit cards doesn’t have to mean you’re the one doing all the teaching. Consider enrolling your kids in an age-appropriate financial literacy course (many of which can be found at your public library for free) or using apps like Bankaroo to teach your children about spending, saving and buying on credit.

If you could also use a refresher on credit scores, credit reports and using credit responsibly, check out Bankrate’s Credit Cards 101 articles.

3. Explain to them what being an authorized user on your credit card really means

If you make your child an authorized user on your account and give them a credit card to use, then you’ll be able to review their charges. You’ll also be the person responsible for making payments on the card, so your child will have to make their monthly credit card payments to you instead of the card issuer. In other words, they’ll have to pay you back for everything they charge to your credit account — and if they buy something they can’t pay off, you’re on the hook.

Explaining this to them is a good way to help them understand how their credit card works and what you’ll be able to see when they buy things. You can then help your child adopt good habits by establishing rules when it comes to being an authorized user. Those rules can include:

• Setting a credit limit they cannot go over each month
• Picking a monthly due date for when they must pay you for their balance
• Coming up with potential consequences if things get out of hand

4. Consider co-signing on your adult child’s credit card

Another way to help your child build credit is to help them get their first credit card as an adult. This can mean serving as their co-signer. The Credit CARD Act of 2009 made it more difficult for people under 21 to get credit cards of their own, but co-signing a credit card with your child can be a way around that issue.

When you become a co-signer on your child’s credit card, you and your child share responsibility for any debts charged to the card — and your child’s credit habits could affect both of your credit scores, just like if they were an authorized user. But unlike an authorized user, you can’t control their credit usage.

Becoming a co-signer for your child can be beneficial for their credit journey because they’ll be the person making payments to the credit card account, not you. Having a credit card of their own as opposed to one connected to your account will also do even more towards helping your child build a strong credit history.

But even with these benefits, it’s not always a good idea. If your child doesn’t use their card responsibly, you’d still be on the hook for overdue payments. Plus, they can ruin your credit alongside their own.

A much simpler alternative would be to help them sign up for a secured credit card or student credit card after they turn 18, as stated previously, or to keep them as an authorized user on your card until they turn 21.

The bottom line

Knowing how to build kids’ credit is an important part of modern parenting — so ask yourself what steps you need to take to ensure your children have the financial tools they need to use credit responsibly. Whether you’re adding your teenager to your credit card account or helping your middle-schooler learn how to swipe a prepaid debit card, you’ll be teaching your children financial lessons that could benefit them for the rest of their lives.

Plus, building credit for kids while they’re still under your roof could allow them to leave the nest with the beginnings of a positive credit history — which could be one of the most important financial gifts you can give your children.