According to a 2021 Transunion survey, 5.8 million consumers opened their first credit account in 2021 and most of the new credit users were Gen Z borrowers, making up 59% of this group with an average credit score of 679. This may have you wondering, "How can a new credit user be eligible for credit and what can I do to prepare my children to use credit responsibly?"
1. Add your child as an authorized user to a credit card account.
According to Experian, “Adding your child as an authorized user on your credit card can help them establish their credit history, even when they're young.” Assuming you, the parent or guardian, uses the card responsibly by paying on time and not missing payments, the positive payment history will be reported to the credit bureau which can positively affect the credit score. Be mindful, credit card companies have different requirements for minimum ages of authorized users, however, a majority do not have a limit.
2. Start a Secured Credit Card
A secured credit card is a good way to establish credit for individuals who have never managed credit before. A small deposit is made as collateral and is also the credit limit for the card. For instance, if a $500 deposit is set aside for collateral, it will also be the credit limit for the card. As the balance is used, it can be repaid and used again as a revolving credit line. As on-time payments are made, credit history is reported, which can positively affect the credit score. A secured credit card is a low-risk way for a financial institution to lend to an individual who has never used credit.
3. Open a credit builder loan for your child
Credit builder loans are similar to secured credit cards as they are a good tool to establish credit for individuals who have never had credit. A small deposit is made as collateral and payments are made on the amount of the loan for the agreed upon term. For example, if a $500 loan is secured as collateral, a monthly payment is made on the $500.00, and funds that are repaid become available as the loan is repaid.
While using these credit-building ways to establish and increase your child’s credit score, be sure to keep these tips in mind:
Pay on time and every time. Missing a payment or making a late payment has the largest effect on your credit score and will not only affect your score but your child’s score as well.
Review your child’s credit report at least annually. Consumers can visit www.annualcreditreport.com to review a credit report from each of the three credit bureaus, Experian, TransUnion, and Equifax.
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