At the very end of this series on the Basics of Credit, let’s talk about Credit as it relates to your family, particularly, the kids. Check out the previous topics, if have not done so, yet.
Watch the video presentation right here. Or if you don’t want to hear me droning on, read below.
When you are first starting out, either as a young adult or maybe as a newcomer in the U.S., you need to build up a credit history before anyone will give you a credit card or loan. How do you go about this?
(1) Secured Credit Card
First option, you can obtain a Secured Credit Card. This requires a cash deposit, which then becomes your credit limit. Use this card responsibly. Keep utilization low. Pay on time every time. Do not carry balances. And… you will begin to accrue a credit history. From thereon, build upon it. Get another card or two and you will see your Credit Scores continue to go up.
(2) Authorized User
If you have a partner or spouse with good credit, this gets a lot simpler. You can get on one or more of their credit cards as an Authorized User (AU). First though, please have an open discussion to make sure you see eye to eye on credit/financial behavior and share similar goals in this regard.
An Authorized User is someone who can put charges your card but is not legally responsible for debt payment.
Find out if the credit card company reports AU information to the Credit Bureaus. That is, after all, the point of the exercise. Within about 30 days, the credit card company reports your information to the Credit Bureau. Then the card’s entire history shows up in your credit file- thereby starting off your credit history.
Things to consider
- Use a card with no negative information. Otherwise, that negative history will now be reflected in the Authorized User’s credit history, too.
- As an aside, if the Authorized User has any negative information in their Credit history, none of it is transferred to the primary cardholder.
- Also, if/when the Authorized User is no longer on your card, it doesn’t drop your score one bit.
- Use a card that the primary user has had for a while. Most cards backdate the Authorized User information all the way to when the card was first opened, thereby increasing length of credit history.
- Stay vigilant about card usage- otherwise both of you will damage your Credit Score.
- Charges and payments are not separated by user, so you are really in it together.
Point to Note: Authorized User status counts less towards your Credit Score than primary cardholder status. Its relative importance in the newer FICO versions is even lower. So this is usually just a stopgap measure.
People often use this strategy for:
- a spouse with low Credit Score or no credit history
- a child when she first starts out adulting
- even other family members- such as siblings, etc- if there complete trust
- Also, even if both spouses have fair credit, you can boost both credit files by adding the other as authorized user, thereby increasing number of the open trade lines.
More Side Notes:
- Consider having a card or two on which you are the sole owner, in case of unforeseen circumstances, such as divorce.
- The stay-at-home parent can use household income, which includes a spouse’s income as “stated income” when applying for a credit card.
- And, this really shouldn’t need mentioning but it is illegal to lie about income on your credit application even though credit card companies don’t independently verify it.
Building your Child’s Credit History
The same principles can be applied if you would like to be proactive in building your child’s credit history:
- If your child is over 18, they are allowed to have their own credit card with you as cosigner. This does put you on the hook for all debt obligations on the card.
- For your teen, get a secured credit card or
- add her as Authorized User on one of your cards
- Choose a card which allows minors to be added as Authorized Users. Check minimum age requirement, if any. And whether your card reports Authorized Users to the Credit Bureau.
Again, this assumes you have stellar history on this card. Since any negative information on it will taint your child’s credit history, and may take years to recover.
Then, stay very responsible on credit behavior because now it affects your kid’s credit too.
When Should You Consider Adding your Child as Auth User?
Some people start early. Your Authorized User will accumulate credit history even if they do not use the card. In fact, if you are using the strategy for a younger child, you need not even give them their card.
Other folks suggest that since many Credit Cards backdate Authorized User information all the way back to when the card was first opened, you can wait almost till your child starts using credit.
As in most things, moderation is key. 5-10 yrs may be adequate to build up credit history. I recently added Thing 1 to a card. Thing 2 gets to wait until she can read and write. My card, my rules.
Protect your Child’s Credit
Children make easy targets for identity thieves since most children get a SSN soon after birth and no one is usually monitoring their credit. Unfortunately, often it is a family member or someone known to the child who steals the SSN.
If you suspect ID theft on your child:
- You get credit card offers, bills or collection agency notices in the mail in your child’s name.
- the IRS notifies you that someone tried to file a return on your child’s SSN.
- their school has a security breach
… It is recommended you check for your child’s Credit Report.
Ideally, unless you have added her on a credit card or bank account, your child doesn’t even have a credit file. That in itself is protective.
But then, you have no way of knowing whether her identity has been stolen and her SSN is floating around in the black market… So it’s a bit of a catch-22.
With all the recent security breaches, some go so far as to recommend you check your child’s credit and freeze it. Before becoming victim to ID theft.
How to Check your Child’s Credit Report?
To check a minor’s Credit Report, you cannot go online through AnnualCreditReport.com.
You ask each credit bureau- in writing- for a manual search for the child’s Credit Report. This makes them look for information under your child’s name and SSN. As well as SSN alone- to rule out Synthetic ID Theft. This is where a stolen SSN is coupled with a fake name, address and date of birth. And ID thieves can get a new credit card or bank account, buy a vehicle, rent an apartment, get a job and commit all kinds of crime.
There is a bit of a process to this. It requires you to provide some basic identifying information.
Check for errors and fraudulent account information- anything you don’t recognize.
Then put a freeze on it. A 2018 repeal of a provision in the Dodd Frank Act makes it free in all states to request a freeze on a minor’s credit.
Please remember:
- You have to safegaurd the PIN associated with the freeze for a good number of years: for when you have to unfreeze her credit as a young adult. It should be one of those papers that go into your safe.
- Though the process is cumbersome, it shouldn’t be much of an inconvenience since you rarely need to access your child’s credit.
- If you would like to add her as an authorized user on your card- do that before you freeze her file.
- And last but definitely not least, educate your children early on in money matters, online security and handling sensitive personal information
This was the basics of Credit and your family. This post did get a bit lengthy, but I hope you found it helpful. Thank you!
