How to help your child establish credit without co-signing for a loan or credit card
- You can help your child establish and build credit without taking on the dangers of co-signing for a loan or credit card.
- Co-signing puts your own credit at risk, should your child be unable to pay their bill.
- Instead, you can help them build credit by making them an authorized user on one of your credit cards, by helping them take out a credit builder loan, or by helping them get a student or secured credit card.
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If you're like most parents, you want nothing more than to give your kids the moon, the stars, and everything in between. But if you think that co-signing a lease or loan is the only way to help your children establish credit, you'll be happy to learn that there are other, better ways to get involved.
When you co-sign, you become responsible for payments should the other borrower be unable to pay. If you can't pay in their place and make late or incomplete payments, the negative activity will damage your credit score. But it's possible to help your child build a solid credit profile without putting your own credit health on the line.
How to help your child build credit without co-signing
1. Make your child an authorized user on one of your cards
One of the easiest ways to help your children (or any loved ones) build credit is to add them onto one of your existing credit cards as an authorized user. Plus, if you want to help your child start building credit before his or her 18th birthday, authorized user status on an existing credit card may be your only option.
Note that adding your child as an authorized user, instead of co-signing for a card, keeps your credit reports and scores safer. As a co-signer, you don't necessarily control the bill, so you wouldn't know about a late payment until after your credit has already been damaged. As the primary user on a credit card where your child is an authorized user, however, you'll know about any activity before it becomes a problem (and potentially have the ability to set spending limits).
Here's how the authorized user strategy works.
- Call your card issuer and ask for your son or daughter to be added onto your credit card as an authorized user. Make sure to have your child's Social Security number and date of birth handy, in case you're asked.
- Once your request is approved, a new card in your child's name will be mailed to your address.
- As an authorized user, your child will have charging privileges on your account. (Some card issuers, like American Express, will let you set spending limits for authorized users.) Yet although your child has charging privileges, your son or daughter won't be legally liable for the debt on the account.
- Many card issuers will report account activity to the credit bureaus each month for both primary card holders and authorized users. So, if your credit card has a long history of on-time payments, that good history could show up on your child's credit report.
Remember, if an authorized user account is added to your child's credit reports, it has the potential to boost or damage your child's credit scores. You'll need to keep your credit utilization rate (the percentage of your credit limit in use) low and keep your payments on time. Otherwise, the account could possibly hurt instead of help the credit ratings of both you and your child.
2. Help your child take out a credit builder loan
Is your child at least 18 years old? If so, he or she may be able to open a credit builder loan to help establish some credit.
These installment loans are offered by a number of local credit unions as well as online lenders like Self Lender and Credit Strong. Before your child (or anyone, for that matter) applies for a new credit account, it's always a good idea to check all three of his or her three credit reports from Equifax, TransUnion, and Experian. If your child discovers mistakes on his or her credit reports, they can be disputed.
Here's how credit builder loans work.
- If your application is approved, the lender issues you a loan for a relatively small amount - often $500 to $1,000.
- However, the lender doesn't hand over the money to you immediately. Instead the money is deposited into a savings account that typically earns interest. (Check with the lender to be sure.)
- You make monthly payments to the lender for your loan, plus any interest and fees. It usually takes somewhere between six and 24 months to pay off the loan.
- As long as you make all of your payments as agreed, those on-time payments are reported to the credit bureaus. If you pay late, those late payments may be reported as well.
- Once you've made the final payment, the funds you borrowed, plus any interest earned, are yours.
As long as they're managed properly when it comes to monthly payments, credit builder loans can be a great way to help your child both establish some credit and build a small emergency fund at the same time.
3. Let your child get a student or secured credit card
When your child is new to credit, it can be challenging to find a lender that's willing to take a risk and issue his or her first credit card. However, challenging doesn't equal impossible.
A student credit card or a secured credit card can potentially be a good fit for young people who want to establish credit on their own, without the need for a co-signer. Just remember, before your child applies for any type of credit, it's a good idea to check his or her three credit reports first.
Student credit cards: People with limited to no credit history may be able to qualify for a student credit card without a co-signer, provided they earn enough income on their own.
- Discover it Student Cash Back
- Wells Fargo Cash Back College Card
- Bank of America Travel Rewards Credit Card for Students
- Petal Card
Secured credit cards: Another option your child might want to consider is a secured credit card. With a secured card, your child will make a deposit with the issuing bank that's equal to the credit limit on the account. Since the account is being secured with your child's own funds (or the funds you give them), there's less risk involved for the lender. That can make the card issuer more likely to approve the application.
Some options to consider include:
- Citi Secured Mastercard
- Capital One Secured Mastercard
- Discover it Secured
Regardless of the type of credit card your child opens, account management is key. Set your kids up for success by teaching them to make their payments on time, every single time. It's also important that your children know carrying a credit card balance (and thereby increasing the utilization ratio on their credit report) can be both expensive and potentially bad for their credit scores at the same time.
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