In 2009, the US government passed the CARD Act, stating a child must be over 21 or have a steady income before they can be considered for their own, personal credit card/line.
The CARD Act has helped prevent the frivolous use of credit by forcing young adults to wait until they are more responsible and financially secure before opening their own credit card; while it is important for a young adult to be fiscally responsible and understand the value of a dollar before opening their own line of credit, it is equally important to note that an individual’s age of credit history can have a significant impact on their personal credit score. That being said, adding your child as an authorized user on your line of credit can have a positive effect on a child’s personal credit score once they are able to add primary accounts. This can help them stay ahead of the curve later on in life.
One of our clients’ recently considered adding his daughter to his line of credit as a gift for her tenth birthday. He asked us if it would help her credit now. It will not help her right now but could in the future. Without primary credit in her name the score formula will ignore the authorized user accounts and they will not add any value. Once she has primary credit in her name the authorized user accounts will be computed into the FICO score formula. The open dates will become a part of the average age of credit and scores will increase. If the parent has high balances and poor payment history on the account it could negatively impact the scores.
While it is simple and more efficient to add a child as an authorized user on a credit card, some parents don’t particularly like this option because adding a child as an authorized user means that the child has the authority to use the credit card as they please. Some parents consider this a high risk and don’t want to be held responsible in the event that their child accumulates a large outstanding balance.
For parents that are concerned about adding a child as an authorized user on their credit card, creditors offer a secured credit account option; the purpose of a secured card is to allow children, ages 13 to 21, to start building their credit from 0. Either the parent or the child will deposit a cash amount as collateral and if the child hits the cap, they are ineligible for additional credit. This option requires a full credit application, security deposit and an adult-cosigner, and forces the child to develop a better understanding of their finances and spending habits. A secured account might be a better option for a child that is not financially mature enough to be an authorized user on a credit card; the downside of a secured account is that the child is left to build their own credit from scratch and in turn, they will not reap the benefits of their parent’s credit history. It is also important to remember that if the child is responsible for paying the bill, it can impact the co-signers credit if it is paid late.
Regardless of which option is a better fit for your circumstances, the bottom line is that it is important to consider developing your child’s credit history before they turn 21.There is no “good age” to start a line of credit for a child because every situation is different. It is important to consider your child’s emotional maturity and their understanding of money as a factor when considering when to open a line of credit for them and ultimately, which option you choose. The purpose of exposing your child to the world of credit before they are able to access their own, personal credit card, is to help them gain a better understanding of credit and develop better credit habits, but in order to do that, they will need a solid understanding of the value of money and a basic financial foundation. Influencing your child’s age of credit history and spending habits will likely save them money on interest rates and credit lines later on in life, so the sooner you are able to start, the better.
If you have any credit questions feel free to reach out to us for a free credit review.
Comments (3)Subscribe to CommentsComment