Nearly a decade ago, the US government passed the Credit Card Accountability Responsibility and Disclosure Act, better known as the CARD Act. This piece of legislation was initiated in response to the unfair fees and tactics that were once very common practice for credit card issuers. It basically offered credit card holders their long overdue bill of rights.
The CARD Act also offers protections for young adults by stating that they must be over 21 years old or have a steady income, before they can be considered for their own personal credit card or line of credit. This has helped prevent the use of credit by forcing young adults to wait until they are more responsible and financially secure before opening their own credit card.
One major issue that led to the passing of The CARD Act, was that young adults were being given lines of credit with no means to pay back the debt and no real understanding of how to use a credit card. So credit card companies were blindly issuing revolving lines and then charging exorbitant fees and penalties when the debt was left unsatisfied. Credit cards should not be issued to an 18 or 20 year old with no income. College freshmen were racking up thousands of dollars in credit card debt and causing significant damage to their credit profiles before they even had a chance to start building credit let alone have a job.
The young average age of credit can hurt credit scores.
This legislation was an important move to protect young adults, who are not yet fiscally responsible and should not be issued a line of credit that they are incapable of paying back. Although, it’s also important to consider the impact this has on a consumers ability to start building their credit history at a young age. When a consumer is able to start building up healthy credit at age 18 or 19 and is taught to manage their bills and accounts responsibly, they can depend on having well-established and aged credit by the time they are ready to take out their first car loan or even their first mortgage. There are ways to make sure that young adults are able to build their credit history and still be protected from the temptation and risk of their own revolving credit account.
Parents can help their kids build an older age of credit.
Since “average age of credit” is a factor that impacts credit scores, it is crucial to have the most seasoned credit as possible reporting. The older the average age of credit the better it is for credit scores. Listing your child as an authorized user on an older revolving account (not an American Express card!) in good standing, has many advantages and very few risks. Make sure there is no derogatory history on the account, the account balances are normally low, and ideally it’s a seasoned credit account.
- Your child does not have to use the account or even have a card, to be listed as an authorized user.
- Your positive credit history will reflect on your child’s immature credit history making it more well rounded and older
- Once they are ready to open a primary line of credit, being an authorized user will only then help them.
- Keep in mind, the goal is to reflect positive information – do not link them to cards that you have defaulted on or that you regularly carry high balances on.
- Talk to your kids about becoming an authorized user and what it means – this will teach them valuable financial lessons that they wont learn in school.
It’s important that parents are aware that adding your teenager to your credit will only help their credit once a primary account is established. When your teen/young adult acquires primary credit in their name, the score formula will then view the authorized user accounts and they will add value. Once he/she has primary credit the authorized user accounts will be computed and the open dates will become a part of the average age of credit and scores will increase. If the parent has high balances and poor payment history on the account it could hurt scores.
Another option is a secured card. Many credit card providers offer a secured credit account option; the purpose of a secured card is to allow children, ages 13 to 21, to start building their credit from 0. Either the parent or the child will deposit a cash amount as collateral and if the child hits the cap, they are ineligible for additional credit. This option requires a credit application, security deposit, and an adult-cosigner. It forces the child to develop a better understanding of their finances and spending habits. It is also important to remember that if the child is responsible for paying the bill it will impact the co-signers credit if it is paid late.
Parents have the power to really help their kids build healthy credit history and set them up to have strong profiles as adults.