Credit Score

How to Give Your Kid a Good Credit Score

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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.”

Real-Life Financial Education

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.

And, like the parent of a child with a learner’s permit, you may be a little afraid of what might happen with your inexperienced child in control. Only with credit, you won’t be sitting next to a learner; he will be in control. And you may want to do this sooner rather than later, particularly if you intend to add your child to your card as an authorized user (and give her a card).

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. “This would provide the benefits of a positive history without the risk of it being used recklessly by the child,” Paperno says. “The only downside to this method from an educational perspective is that the child doesn’t get much opportunity to show responsible behavior as when actually using a card.”

Other Ways to Build Credit

But there’s another way to put your kid in the driver’s seat: a secured credit card. With this strategy, you can have your son or daughter use money saved from babysitting, gifts or odd jobs to secure a credit card. And then monitor the account closely — and offer some coaching if necessary — to make sure he is establishing good habits.

“If the objective is to let her experience credit management firsthand, then a secured card is probably the way to go, as being the primary cardholder often requires a higher level of responsibility,” says Paperno. “In all cases, paying on time and keeping the balance within 25% of the limit will both lead to a very good credit score and good credit management skills.”

And a parent who feels a bit more relaxed knowing the kid has developed the skills to stay safe in the financial world.

Once your kid has an established credit history, she should also learn how to proactively tend to it. Show her how to pull her credit reports, starting with her free annual credit reports, and how to read them for accuracy.  Then, show her how to check her credit score — and see how the information on the credit reports corresponds to the score. If your kid wants to monitor his scores as he builds his credit, there are a number of paid and free services to choose from (one free service is Credit.com’s Credit Report Card, which offers two free credit scores and a credit report overview, updated monthly).  Seeing how spending and payment behaviors affect one’s credit can be an invaluable lesson.

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Image: Cathy Yeulet

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