A Six Month Old with a 770 FICO Score?

fico scoreYes, it’s possible. Even a baby can begin to establish credit at a tender age.

As a parent, I want to teach my kids to leverage credit to achieve certain goals (e.g., home ownership), but to keep a “cash” mentality similar to that of Dave Ramsey to be “debt free”. Right after my eldest son was born, I added him as a authorized user to one of my credit cards. After six months, he had an amazing credit score-but why does it matter?

The reality is that having a good credit score, whether you choose to use credit or not, is a helpful tool in our society. Beyond letting you buy a car or home with better interest terms, a good credit score can also help you when it comes time to look for a job.  Many employers now run a candidate’s credit to look for any high risk behaviors or delinquencies that may indicate he/she is not a good fit.  Cash is always king, but having some credit history showing that you can responsibly take and pay-off debt, helps lenders better assess your ability to meet the terms of major loan products (e.g., buying a house). How far back, or how long your credit history is accounts for 15% of your total score-so, it certainly doesn’t hurt to start early. While this doesn’t seem important now, eventually it will matter.  As a parent, you always want to set your child up for success and helping them establish a good credit score before they leave the nest is a gift.

To be clear, I’m not advocating the use of credit cards by children or teens. What I’m suggesting is that you leverage your good credit and payment history as a parent to help start your children off on the right foot credit-wise. Here’s how to begin:

Step One:  Select one credit card where you have a solid payment history and have never had a late payment

Since your payment history, and overall credit use on this card, will become your child’s credit it is key that you ALWAYS pay this bill on time. If you’re not willing to commit to this step, you should not begin this process until you’re in a place where you can. Otherwise, you are likely to hurt your child with a sub-par credit history.

Step Two:  If/When a card arrives in your child’s name, destroy it

Given they will not be actively charging with the card I suggest destroying it, or at a minimum, putting it in a safe. If the credit card was to “disappear” or go missing, you would be unlikely to notice it since you don’t use it on a regular basis. If the card was to get into the wrong hands, you could be dealing with fraud issues-which is never fun.

Step Three: Consider a Credit Monitoring Service

The downside of setting up credit for your children is that it also opens them up to the same sort of fraud we experience as adults. You will even start to see new card solicitations hit your mailbox! This means that you have to commit to checking their credit report twice a year for fraud or even easier, set them up on a credit monitoring service. You don’t need to spend a bundle, but do look for one that provides you with a credit report/update more than once a year.

Step Four:  Brace yourself for this question….Should I give my teen a credit card?

When your child becomes a legal adult at age 18, he/she will be able to apply for their own credit.  The question then becomes, should they be able to use a co-signer credit card from your account when they are teens?  I think every child is different, so it’s completely subjective. I would suggest that if you do give your teen a credit card to use that it come with an extremely explicit set of rules, and consequences, related to its use.  I also recommend reducing the credit limit, to shield you and your teen from incurring too much debt.

If you have any questions about my experiences in this space, or around credit in general, please feel free to call me or email me to discuss.

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