Millennial Money: Why adding a child as an authorized user might not help their credit

As parents, we want the best for our children: health, happiness — and hardy credit. Having a strong credit profile can determine whether your kid gets approved for a loan or how much they’ll pay for car insurance when they’re grown. But establishing credit for someone with no credit history is challenging.

A common workaround is for parents to add their children as authorized users on their credit card accounts. Credit checks aren’t required, and the user can quickly piggyback on the primary cardholder’s credit history. But this arrangement isn’t always the right move. Here’s what to know about the potential limitations of adding your kid as an authorized user and alternative ways they can build credit.

THEY MIGHT BE TOO YOUNG TO REAP THE BENEFITS

If you’re hoping to boost your child’s credit before they even learn to tell time, you could face roadblocks. For one, your kid may not qualify for authorized user status. While some card issuers don’t have age restrictions, others require a minimum age of 13 or older.

Even if you can add your child, the issuer may not report their account details to the credit bureaus. Some issuers allow kids as young as 13 to become authorized users but only report credit information for those age 18 and older. It’s wise to ask your credit card company how authorized user arrangements work.

MISUSE CAN LEAD TO DAMAGED CREDIT

Being an authorized user doesn’t guarantee improved credit. “Same as the primary account holder, it can affect your credit positively or negatively, depending on how the card is used,” says Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling.

If you have a record of on-time payments and don’t use too much available credit, that can generate or help your kid’s credit score. But your credit and your child’s can suffer if either person uses the account unfavorably.

Ultimately, it’s up to the parent to keep the account in good standing.

“When you add someone as an authorized user, that’s what they are. They’re authorized to use the card but they are not legally bound to pay the bill. You are legally bound to pay the bill,” says Julie Beckham, an accredited financial counselor and financial educator in the Boston area.

You don’t need to give your kid the credit card. As long as the primary cardholder keeps their account open and active, the authorized user’s credit will share the effects. If you give your child the card, set some ground rules. Talk about when it’s OK to use the card, how much they’re allowed to spend and who will make the payments. Some credit card companies let you place spending limits for authorized users.

Removing your kid as an authorized user can undo damage to their credit if the arrangement goes wrong.

AUTHORIZED USER STATUS MIGHT NOT BE ENOUGH FOR FUTURE LENDERS

Some lenders don’t take authorized user accounts into consideration when reviewing credit applications or give them much weight. “If you’re a lender and you’re looking at someone and you see the designation that they’re an authorized user rather than the primary account holder, it’s just telling you that this person did not have to go through a credit approval process to have access to that account,” McClary says.

Having an account in their own name puts your kid in a stronger position because it shows they’re equipped to manage payments. You can guide them toward opportunities in adulthood.

“There are credit-builder loans that are available. There are starter credit cards for young adult consumers, where the threshold for approval is a little bit lower. You can also look at options for secured credit cards that require no credit check, but they require a good faith deposit in order to open the account,” McClary says.

Co-signing your kid’s car or student loan can also help build their credit as they make on-time payments, but as with authorized user relationships, make sure you understand the risks.

EXPLORE OTHER WAYS TO GET YOUR CHILD CREDIT-READY

The best way to set your child up for success is to talk to them about money, Beckham says.

You could look over your credit reports together or explain how many hours you need to work to pay for things like dinners or fun outings.

Encouraging good routines, like doing chores and turning in homework on time, is also important. “They’re transferable habits that can help them in their life financially as they build credit,” Beckham says.

Give your child opportunities to practice managing money before they graduate to credit. Beckham suggests letting kids test the waters with a checking or savings account. “Starting with their own money is always better because there is a sense of ownership and accountability to that,” she says.

This column was provided to The Associated Press by the personal finance website NerdWallet. Lauren Schwahn is a writer at NerdWallet. Email: lschwahn@nerdwallet.com. Twitter: @lauren_schwahn.

RELATED LINK:

NerdWallet: How to build credit https://bit.ly/nerdwallet-how-to-build-credit

FILE - Several VISA and MASTER credit cards are shown in Buffalo Grove, Ill., Thursday, Feb. 8, 2024. Adding your child as an authorized user on your credit card can be a simple way to start building their credit file. But if the issuer doesn’t report account details to the credit bureaus or your account isn’t in good standing, their credit score won’t get enhanced. (AP Photo/Nam Y. Huh, File)

TOKYO (AP) — Japan’s parliament on Friday passed a revision to the country’s civil code that will allow divorced parents the option of joint child custody, a change that brings the nation in line with many other countries.

The revision, the first to custody rights in nearly 80 years, is to take effect by 2026. It will allow divorced parents to choose either dual or single custody while requiring them to cooperate in ensuring their children’s rights and wellbeing.

Under the current law, child custody is granted to only one divorced parent, almost always the mother.

The change comes as divorces are increasing in Japan and a growing number of divorced fathers hope to stay in touch with their children. A number of high-profile allegations by divorced foreign fathers of child abductions by former partners who returned to Japan also encouraged the change.

The revision requires the sharing of child rearing costs by the parent who is not the main custodian. Currently, most divorced mothers, who often are part-time workers with low incomes, do not receive financial support from their former husbands.

In cases in which domestic violence or abuse by either parent is suspected, the other person will have sole custody, according to the revision.

Supporters of joint custody say it allows both divorced parents to play a role in child rearing. Opponents, including rights groups and some victims of domestic violence, have raised concern that the new system could make it harder for parents to cut ties with abusive spouses and that they may not be allowed a real say in custody decisions.

The concerns prompted some modifications to the legislation during parliamentary debate to require authorities to make sure the custody decision was not one-sided.

Under the revision, divorced parents who choose joint custody must reach a consensus on their children's education, long-term medical treatment and other key issues, and will need to seek a family court decision if an agreement cannot be reached.

Either parent can make decisions about their children's daily activities, such as private lessons and meals, or emergency treatment.

The revision is to be reviewed five years after it takes effect.

Japan’s lawmakers pass a revision to the country’s civil code that will allow divorced parents the option of joint child custody, at the parliament in Tokyo Friday, May 17, 2024. The revision, the first to custody rights in nearly 80 years, is to take effect by 2026. (Kyodo News via AP)