As a parent, you strive to give the best to your child – the best possible home environment, the best schools – and the best possible financial foundation. One way to get Suzie or Jimmy off to the right start financially is by helping them establish and maintain good credit. Fortunately it’s relatively easy to help your child build a good credit history and a high FICO score.
Laying the Foundation
Back in the day, credit card companies issued cards to incoming college freshmen like candy, whether the recipients had any means of paying the bill or not. They knew that mom and dad would be likely to bail out a student who ran up too much debt ordering pizzas and Spring Break plane tickets. The Credit Card Act of 2009 largely put an end to those practices, requiring prospective card holders under age 21 to show evidence of real income – or provide a creditworthy co-signer.
But adding your child as a joint user to your account or co-signing a credit card application for your child isn’t necessarily a smart move. Instead, parents should assist children in establishing their own credit long before Jimmy or Suzie begins thinking about credit. That means urging your child to deposit at least some of the case received as a birthday present from Grandma into a savings or checking account instead of splurging all of it on video games or ringtones. Your child should also make regular deposits into the account and avoid overdrafts on a checking account. Having established bank accounts in good standing will boost your child’s overall credit standing in addition to making it easier to qualify for a credit card down the road.
You should also encourage your child to earn his or her own money through a part-time job. Leaf raking and babysitting are fine ways to earn money for kids not old enough to legally hold part-time jobs. Once children hit their teens, there’s nothing wrong with requiring them to earn their own money through part-time work to finance trips to the mall or cover their monthly cell phone bill or the cost of splitting a limo for prom. You’ll not only be teaching them how to value their time, but they’ll be establishing the necessary means to qualify for credit later.
Piggyback Your Child’s Path to Good Credit
Piggybacking allows parents to add their children as authorized users to one or more of their credit card accounts without requiring that person to undergo a credit check. The authorized user gets an instant boost to his or her FICO score without becoming liable for the original user’s bills. The whole system works great as long both parent and child play nice, don’t max out the credit limit and pay bills on time.
But piggybacking can also backfire. If Mom or Dad’s credit takes a hit, say after a job loss, the authorized user’s credit score declines too. Likewise, Jimmy or Suzie can rack up huge bills and leave their parents holding the bag.
Piggybacking was also subject to widespread abuse. Commercial enterprises sprang up that sold piggybacking services by randomly matching consumers with bad credit with consumers with good credit (who received payment for their participation). Unlike conventional piggybacking, commercial piggybacking never involved issuing actual credit cards to authorized users, who were merely paying for enhanced FICO scores.
As a result, the entire practice of piggybacking was nearly abolished with the introduction of the FICO 08 scoring model by the Fair Isaac Corporation, which issues FICO scores. Fair Isaac initially announced that the FICO 08 scoring model would do away with the practice. However, after developing a new algorithm that reportedly detects fraudulent use of the piggybacking strategy, the Fair Isaac Corporation reversed course. The good news is that the time honored tradition of piggybacking as a means of boosting your child’s credit remains intact.
Your Child’s First Credit Card
By following the strategies above, your child should be well on his or her way to establishing a good credit foundation. But because of the tougher rules enacted by credit card reform, your child may still find it difficult to obtain credit. If so, applying for a secured card might be a good solution.
Try approaching your local bank or credit union with a proposal to apply for a secured credit card backed by a Certificate of Deposit held by the institution. If the plan works, your child not only gets a credit card, he or she stands to gain from the earnings accumulated by the CD. After a year or so of responsible use, your child stands a good chance of graduating to an unsecured credit card – and cashing in the CD, plus interest.
Encouraging Smart Credit Card Use
Once your child begins to obtain and use credit, your job as a parent is not done. Educate your child about how credit scores are calculated, emphasizing the importance of maintaining consistent on-time payments and keeping credit card balances as low as possible. Flaking out on payments or maxing out their credit cards will sink your child’s score faster than almost anything else. In fact, these two elements alone: payment history and amount owed add up to more than 60 percent of a total FICO score.
If you notice your child getting into trouble, it’s tempting to bail him or her out. If your child gets mono and lands in the infirmary for weeks, it’s totally OK to make payments on their behalf. On the other hand, letting your child deal with late fees from missing a payment may be just the lesson that is needed to instill smarter credit use in the future.
Your Child’s Bright Credit Future
Establishing standards for spending and saving may not make you the “cool” parent for your child now, but dealing with your child’s short term disapproval will pay dividends now and in the long run. Your child will come to appreciate the benefits from the financial lessons and demands you’ve implemented, and you’ll be assured that you’ve done the best job possible to help your child establish a good financial foundation. For parents, it doesn’t get much better than that.
Audrey Henderson is a Chicagoland-based writer and researcher. She holds advanced degrees in sociology and law from Northwestern University. Her writing specialties are sustainable development in the built environment, policy related to arts and popular culture, socially and ecologically responsible travel, civic tech and personal finance.