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Helping Your Child Build Credit

Once upon a time when a child went off to college they were inundated with credit card solicitations, often to their (and their credit score’s) detriment. Among other needed reforms, the Credit CARD Act of 2009 eliminated the ability of a card company to entice consumers under the age of 21 without an independent income to sign up for cards using excessive marketing, gifts and, of course, pizza.  While laudable, this act has put the burden on parents to step in and make sure their children who are full time students have access to a credit card for emergencies and for building a credit history for when they finish school and start applying for loans.  There are several ways to accomplish this goal:

Make the child an authorized user on your card – this involves calling your credit card company and having them issue a card with the child’s name on it that they can then use as their own. The disadvantage of this method is that even you have an agreement that your child will cover their charges you are, in fact, liable for those amounts as well as your own. The advantage to this method is that you can monitor your child’s charges and if they charge irresponsibly you can rescind the authorization with another call to the credit card company. Also positive activity, paying on time and in full, will show up on your child’s credit report as well as yours, building a positive credit history for the child.

Co-sign for a card for your child – if you have highly trustworthy children you may use this option. The disadvantage is that the child is the primary account holder. They receive the bills and if they do not pay the co-signer may not know until the debt is delinquent, damaging the credit score of child and parent alike and possibly leaving the parent responsible for paying the bill. Also, as the primary account holder, the child can raise the credit limit without the co-signer knowing. If you elect this option, it’s often best to start before the child leaves home for college while you can still monitor and observe their spending habits and continue to educate them on using credit responsibly.

Secured cards – if your child is not particularly responsible and the above options cause you undue anxiety consider a secured card. With these cards, you make a deposit in the bank, often a few hundred up to a few thousand dollars, and this deposit establishes the credit limit on the card. While these cards are expensive, generally charging annual fees and often penalties for paying late or going over limit, they can be a good option for starting slowly. Again, if you elect this option, it’s often best to start before the child leaves home.

Whichever way you choose, helping your child learn about and establish credit is an important life skill and eventually, sometime in the far distant future they might even thank you for it and offer to buy you pizza.