What actions should I be taking to establish good credit scores for my children?

Question

I have already opened an account for my child to deposit cash birthday presents from relatives. The default credit union account has a savings account and a checking account. I could also add an overdraft line of credit or a credit card to that same account at no additional cost, and there is no penalty for never using those credit lines. When that child gets older I could have that child cosign on a vehicle loan and pay it for 6 months before paying the balance in full, or I could add the child to a HELOC with a very low limit. What are the best ways to establish the credit now--when I'm in the driver's seat as it were--so that it will be less likely for me to be asked to cosign on loans later?

Obviously all of these actions would involve discussions about credit and finance, so that when it's time to fly solo, that child will have enough knowledge to make good decisions. This is not a parenting question, I don't care whether you think it is a good idea to do this from a parenting perspective. I only care about how to best accomplish the goals outlined above, from a personal finance perspective.

Edit: I have found many institutions will allow joint ownership of accounts between parents and children, and that a credit history can be established through this mechanism before the age of 18.

Some years ago when I went through this process myself, I was in the unfortunate position of not being able to obtain financial aid to attend school because my father made too much for me to qualify. He had too many of his own financial obligations to actually contribute financially to that effort (we lived in the San Francisco Bay Area, and the high salary was offset by an even higher cost of living). I had to work to pay for my school. This required 80+ hours each week for those combined efforts. My parents didn't have a vehicle to lend, so I had to purchase and insure my own vehicle as well (public transit would have cost another 4 hours of each day between home school and work).

I'm glad I was forced to complete my education without loans, but I could have worked fewer hours if I could have obtained credit on better terms. You can opine all day about whether a child needs a credit history. That's not the topic of this question. I managed fine under the circumstances. I didn't need a good credit history in order to make it work. It would have been a benefit, and it certainly would not have hurt me. I don't care if this is a new idea that rubs you the wrong way. The question is not should I or can I, the question is what is the best way?

Answer 1

When I was in high school, my mom got me a joint credit account with both of our names on it for exactly this reason. Well, that, and to have in case I found myself in some sort emergency, but it was mostly to build credit history. That account is still on my credit report (it's my oldest by a few years), and looking at the age of it, I was 17 at the time we opened it (and I think my younger sister got one around the same time).

In my case, I now have an "excellent" credit score and my weakest area is the age of my accounts, so having that old account definitely helps me. I don't think I've really taken advantage of it, and I'm not sure if I'd really be worse off if my mom hadn't done that, but it certainly hasn't hurt. And I plan on buying a house in the next year or so, so having anything to bump up the credit score seems like a good thing.

Answer 2

Until they're old enough to be legally responsible for their own credit, the only thing you can really do is show them by example how to manage money and credit in your own finances. Teach them budgeting, immerse them in understanding how credit and financing work, and teach them smart ways to make their money work for them.

When they're teenagers, you could potentially approach small banks or credit unions about ways to perhaps co-sign loans for them and let them make payments to learn good habits for managing their responsibilities, but that's not always easy either. It won't do anything for their credit, but having the responsibility of coming in to make payments might instill good habits and help their self-esteem at the same time.

You have great intentions, but as has been pointed out here already, from a legal standpoint there's not much you can do. All you can do is prepare them for the day when they are on their own and can enter into credit agreements. Kids going to college get into real trouble with credit because cards are handed out like candy to them by the banks, so teaching them money management skills is invaluable and something you can do now.

Answer 3

You really can't. Credit rating is determined by financial history, and until your kids are old enough to legally sign a contract they have essentially no financial history.

Interesting out-of-the-box thought, but not workable.

Answer 4

My son who is now 21 has never needed me to cosign on a loan for him and I did not need to establish any sort of credit rating for him to establish his own credit.

One thing I would suggest is ditch the bank and use a credit union. I have used one for many years and opened an account there for my son as soon as he got his first job. He was able to get a debit card to start which doesn't build credit score but establishes his account work the credit union. He was able to get his first credit card through the same credit union without falling work the bureaucratic BS that comes with dealing with a large bank. His interest rate may be a bit higher due to his lack of credit score initially but because we taught him about finance it isn't really relevant because he doesn't carry a balance.

He has also been able to get a student loan without needing a cosigner so he can attend college.

The idea that one needs to have a credit score established before being an adult is a fallacy. Like my son, I started my credit on my own and have never needed a cosigner whether it was my first credit card at 17 (the credit union probably shouldn't have done that since i wasn't old enough to be legally bound), my first car at 18 or my first home at 22. For both my son and I, knowing how to use credit responsibly was far more valuable than having a credit score early.

Before your children are 18 opening credit accounts with them as the primary account holder can be problematic because they aren't old enough to be legally liable for the debt. Using them as a cosigner is even more problematic for the same reason. Each financial institution will have their own rules and I certainly don't know them all. For what you are proposing I would suggest a small line of credit with a credit union. Being small and locally controlled you will probably find that you have the best luck there.