Should you make your child an authorized user on your credit card? It depends on several things.
By establishing an Authorized User relationship, your child has the opportunity to start building a positive credit history even though they are still too young to open their own credit card. Plus, teaching your kids how to use credit responsibly can help them develop the kind of good financial habits that could last a lifetime.
Laura Spencer, an educator and design thinker who is currently designer-in-residence at UCSD’s Design Lab, has made her two daughters authorized users on her credit cards. “My eldest daughter is almost 24 and just bought her first house,” says Spencer. “It’s because she learned to manage money responsibly and established good credit. I think the credit card has definitely helped her credit rating.
However, not all parents think making their children authorized users is a good idea. Financial advisor Joyce Rojas decided she would help her son build his own credit from scratch.
“What we did instead of adding him as an authorized user was save him $300 and request a secure card,” Rojas says. “Six months later, that same credit card returned his $300 and offered him a $1,500 line of credit. He built his own credit on his own! It taught him that he can create his own financial freedom.
What happens when you make your child an authorized user?
When you make your child an authorized user on your credit card, your child can make purchases on your existing line of credit. Your child will receive a unique credit card linked to your account. This card can be used for in-person and online purchases, and any charges made to the card will appear on your monthly credit card statement.
You are responsible for paying all charges billed to your account, even charges charged by your child, and most credit cards allow parents to set spending limits to ensure their child does not accidentally charge more. than the household can afford.
“I decided not to ask the credit card company to limit the account because I wanted it to be available for emergencies,” Spencer told us. “For example, if their car broke down away from home, I didn’t want the card to be declined because the repairs were over a certain amount. Since my credit card app shows me how much is spent per user, this worked fine. »
Can making your child an authorized user boost their credit?
One of the biggest benefits of making your child an authorized user is the ability to help them build good credit at a relatively young age. When a person becomes an authorized user on a credit card, any activity on the credit card has the potential to become part of their credit report.
If you make an on-time payment on your credit card, for example, your child might have that same on-time payment added to their credit history — and since payment history makes up 35% of your FICO credit score, that positive payment record could give your child the opportunity to start building credit before they are even old enough to open their own credit card.
What does this mean in real life? “With my youngest, who is now 19, we just bought a car and put $9,000 on a car loan,” says Spencer. When we applied she had a fabulous credit score based on my card.
Having good credit when taking out a car loan could save you a lot of money, in terms of lower interest rates. Building good credit early can also help your child gain access to some of today’s best credit cards, especially when they might otherwise be limited to starter credit cards or credit cards for people with no history. credit.
What else can you do to help your child get good credit?
Whether or not you choose to make your child an authorized user of your credit card, there are many ways to help your child develop good financial habits and establish a positive credit history.
“We talked a lot about credit and why it’s important to live within our means,” says Spencer. “I was also struggling with massive student loan debt, so I made sure they understood how compound interest worked and why it’s important to pay off credit card debt.”
Spencer also set ground rules for how her daughters could use the shared credit card. “When they were full-time students, they were allowed to refuel once a week, and I paid for that expense. If they wanted to use it for other purposes, like buying something from Amazon, they had to let me know the cost up front and pay cash right away. It was to teach them that a credit card is not about spending money we don’t have, but about paying wisely for our purchases.
Rojas, on the other hand, decided to teach his son about credit by helping him get his own secure credit card. This way, he would be responsible for all purchases and payments.
“It gives him privacy on what he’s buying rather than seeing everything he’s buying,” Rojas told us. “It also saves me asking him why he’s spending on XYZ or telling him he’s spending too much. I don’t want to keep my teenager, I want to empower him to realize the repercussions of his own actions. Getting him a secure card instead of adding him as an authorized user did just that!
How long does your child have to be an authorized user?
Some parents may decide to remove their children as authorized users once their children have graduated from college or started their first job. Other parents prefer to keep the authorized user relationship active.
“Both of my children are now adults and are still on one of my credit cards,” says Spencer. “They don’t actively use it, but it provides them with a positive credit history and, more importantly, they still have access to funds in case of an emergency.”
Keeping her daughters as authorized users also gives Spencer the ability to provide financial support at any time. “Not too long ago my eldest was driving through Texas and called to chat. I could tell she was exhausted and didn’t want her to risk her life by continuing the ride, so I told her to get a hotel and put it on my card,” Spencer told us. “I think those types of moments build a strong mother-daughter relationship across the board. They know that I will always be there for them, whatever the situation or the need.
The bottom line
Should you add your child as an authorized user on your credit card? For some parents, this is an easy way to help their children accumulate credits at a relatively early age. Other parents may encourage their children to open their own lines of credit instead of piggybacking on a shared credit account.
Whichever path you choose, be sure to take the time to teach your children how credit works and the importance of building a good credit score. So your kids will have the tools they need to build a strong financial future.