How This Stepping-Stone Strategy Helps Parents Improve Kids’ Credit

Learn how a stepping-stone strategy can help parents build their children’s credit scores. This approach sets the foundation for financial success by teaching responsible credit management and creating opportunities for future financial growth. By guiding kids early, parents can help them establish good credit habits and prepare for major milestones like loans, rentals, or purchases.

Parents looking to help their children build credit early can take a simple step, financial experts suggest: add them as authorized users on a credit card account. This approach allows children to begin establishing credit by leveraging the positive credit history of their parents, who are the primary account holders.

According to Ted Rossman, senior industry analyst at CreditCards.com, this method works best for teenagers around 16 or young adults in their early 20s. He describes it as a “stepping stone” to creating a solid credit foundation. “It’s become harder to establish credit independently, and this strategy is a helpful workaround,” Rossman explained, adding that it can be highly beneficial. Andrea Woroch, a consumer finance expert, notes that allowing kids to use a credit card responsibly also teaches essential credit management skills, helping them develop healthy financial habits early on.

Why Building Credit Matters

Credit scores, which range from 300 to 850, significantly impact financial opportunities. Scores in the low 700s or higher are typically considered excellent by lenders. Factors influencing credit scores include payment history and account longevity. Building credit early can provide substantial benefits, such as qualifying for loans or securing lower interest rates.

Additionally, credit scores are often checked by landlords, utility companies, cell phone providers, and even potential employers during the application process.

Key Considerations

Experts advise parents to use this strategy only if they have good credit themselves. “As long as you pay bills on time and avoid carrying large balances, your child will benefit from your positive credit history,” Woroch emphasized. Parents should also establish a timeline, perhaps keeping the arrangement in place for one to three years, depending on individual circumstances, Rossman said.

It’s important to note that this is not a joint account. The primary account holder is legally responsible for all charges made by authorized users, meaning parents could face financial risk if their child overspends or fails to adhere to guidelines. Most card providers allow parents to set spending limits for authorized users. Experts suggest keeping allowances modest, such as enough for occasional gasoline refills or a few movie outings each month.

In fact, parents don’t even need to hand over the physical card to their children, as the credit benefits apply regardless of whether the card is used, Rossman explained. Ultimately, clear rules and boundaries are crucial. “Parents should ensure their kids understand when and how to use the card responsibly,” Woroch advised.

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Source: CNBC‍