When it comes to your credit score, time is an important element.
The longer you can show that you can handle credit responsibly, the more likely your score is to trend higher.
If you’re a parent, establishing credit for your children early on can serve them later in life with better credit scores and lower interest rates.
However, children under 18 can’t open their own credit cards or take out loans. As a parent, you’ll have to get directly involved to help your minor children develop good credit.
Here’s a look at how parents can set their children on the path towards good credit, along with the benefits they may realize later in life.
What Goes Into a Credit Score
There are many different types of credit scores.
The FICO score, created by the Fair Isaac Corporation, is the industry standard.
There are five components to a FICO score:
Combined, payment history and credit history length amount to a full 50 percent of an entire credit score.
If you can get your children to establish credit while they are still young, the length of their credit history will help their scores.
Even more important is ensuring that they are making all of their payments on time.
Having a spotless payment history is the single largest factor in determining a credit score.
But, extending that on-time payment history for as long as possible is even better.
Ways to Help Young Children Build Credit
Young children can’t build up credit on their own because they are minors.
Loans are legal contracts and are not available to those under age 18.
However, there are still ways to start building good credit for minors.
Co-sign a loan
A co-signer takes on the full responsibility for the terms of a contract. It’s as if they were the only party involved.
This means if you co-sign a car loan for your child, you’re legally on the hook for the entire loan balance.
If your child can’t or won’t pay you back, it’s just your tough luck.
In many cases, legal and financial experts advise against co-signing a loan for anyone due to this liability.
However, in the case of a minor child, it can be one of the only ways for them to start building credit.
Even if your child isn’t making any of the payments on a co-signed loan, that loan will still show up in their credit history.
Every day that passes, that loan’s age is added to your child’s length of credit history.
This can potentially improve their score.
Every month that you and your child make on-time payments, that helps their payment history as well -- and yours, for that matter.
However, some lenders won’t accept a minor as a borrower, even if you’re on board as a co-signer.
You might consider adding your child as an authorized user to one or more of your credit card accounts.
As an authorized user, your child will be issued their own credit card, attached to your account.
Authorized users have the ability to use a credit card just like the original owner. However, they have no legal liability to pay off those charges.
In that sense, having an authorized user is somewhat like being a co-signer on a loan.
As the original card owner, you’re legally responsible for all charges on your card, even the ones that you child incurs.
On the plus side, the credit history of your card will typically show up on your child’s credit report. Some creditors do not report authorized user accounts to the credit reporting bureaus, but many do.
If your card company does report the account, your authorized user will inherit the credit history of that card.
If you’ve got a long history of on-time payments on that account, the credit score of your authorized user may get a boost.
This is true even if your child never makes any charges on the card directly.
Bear in mind that the account, if reported, will bear the notation “authorized user.”
For some credit scoring systems, this will make the account less valuable than if your child was the primary account owner.
However, any notation is better than none for someone looking to build a credit a good credit history.
How Good Credit at a Young Age Can Help
Lenders are reluctant to lend to those that don’t have a history of paying back their debts.
Although your child might not need credit in their teens, sooner or later they will start applying for their own loans.
Having a credit history can be a big leg up as your child transitions into adulthood.
Getting their first credit card
Once your child turns 18 and heads to college, a credit card can often come in handy.
College credit cards often tailor their benefits to the needs of university students.
Without a credit history, your child might have to turn to a secured credit card to get their first card.
While secured cards have their place, they require a deposit equal to the amount of your credit line.
Unsecured cards have more flexibility and don’t require tying up money, so they’re usually a better option if you can qualify for them.
Having a credit history full of on-time payments can help your child qualify.
Another popular first-time use for credit is an auto loan.
As with credit card issuers, auto lenders like to see the responsible use of credit before extending a loan.
An established credit history can certainly help.
Some lenders won’t offer an auto loan at all to someone without a credit history.
Others may require a co-signer or a large down payment.
If you’ve helped your child build a respectable credit history, they may qualify on their own for an auto loan.
However, you should still be prepared to help out with a down payment or even as a co-signer. This is because auto lenders also take income into account.
Good credit scores and financial independence can also play a role when it comes to getting student loans, particularly for graduate students.
As an undergraduate, students apply for financial aid using the FAFSA form. This form includes parental assets and income.
Graduate students, on the other hand, are considered independent.
Credit scores don’t play a role in accessing federally funded student loans. But, they can and do affect qualification for private student loans.
With a good credit score, your child may be entitled to lower interest rates on private school loans.
Other Ways a Long-Term Credit Record Can Pay Off
The good news is that the benefits of a good credit history don’t run out. In fact, they only increase over time.
The same good habits that helped your child get their first credit card, their first auto loan and their graduate student loans will pay off throughout their lives.
After graduation, your child might be in the market for a new home.
Typically, this involves taking out a mortgage loan.
There are many factors that go into qualifying for a mortgage loan.
Having a sufficient income to be able to make payments on the loan is a big one.
Mortgage lenders also like to see a predictable, stable employment history.
However, a spotless credit history can also be a huge help.
A long-term credit record can reduce the interest rate on your child’s mortgage.
This can result in huge long-term savings.
Think about this: Many home mortgage run for 30 years, and the median home price is about $216,000, according to real estate website Zillow.
If your child can knock down the interest rate on that type of mortgage by just 0.25 percent, they could end up saving $11,000 or more over the life of the mortgage.
For larger mortgages, the savings could be even larger.
The case of children and good credit is another example of how taking the time to learn a few tricks can pay dividends.
Some people assume that since minors can’t sign legally binding contracts, they also can’t do anything to build credit.
With parental help, however, even those under age 18 can start building a good credit history that can pay off throughout their lives.
Steps that you as a parent can take while your children are still young can put them in a position to get lower rates on their own credit cards, auto loans or home mortgages down the road.
Remember that certain steps, such as co-signing a loan with your child, put you in a position of accepting some financial risk.
But these can be educational opportunities as well.
Explain to your child the ins-and-outs of whatever financial arrangements you devise.
With this type of education and experience, your children may be in a position to help their own kids in a similar way sometime in the future.