How Young Can You Start Building Credit?

As adults, we know that having a good credit rating can be a huge benefit in life. It can also be hard to build up credit, especially as first time credit users. Most of us don’t get started until our mid 20s, but the truth is that you can start building credit as young as 18. As a parent, you can help your child build their credit score early by establishing strong financial habits. Here’s what you need to know.   

How Can I Build My Child’s Credit? 

In Canada, you need to be the age of majority in your home province or territory to apply for your first credit card in your name. 

The age of majority is 18 in the following provinces:

• Alberta

• Manitoba

• Ontario

• Prince Edward Island

• Quebec

• Saskatchewan

The age of majority is 19 in the following provinces:

• British Columbia

• New Brunswick

• Newfoundland and Labrador

• Northwest Territories

• Nova Scotia

• Nunavut

• Yukon 

Ages 18 and 19 are when many young adults head off to college and university and could really use credit for student spending and living costs. If you want to help your kid build some credit history before college or university, there is an option available. 

As a parent, you can help your kids build credit history with a cell phone plan.

Get a cell phone plan in their name

If you’re planning on getting your child a cell phone in high school, you could have their cell phone plan opened in their name. When you (or your child) pay the monthly cell phone bill on-time, your child will build a positive payment history, which is the largest factor that impacts their credit score.   

Cell phone bill payments are reported by carriers to the credit bureaus (Equifax and TransUnion), and that information is added to an individual’s credit file. If you and your child make the cellphone bill payment on-time, this positive information will be added to your child’s credit file. 

Once at least 6 months of credit history has been established, your child should have enough information to have a credit score generated. With more on-time payments, your child could start seeing improvements to their credit score. 

How Can I Protect My Child’s Credit History? 

Although a cell phone plan can help you build your child’s credit history, mishandling payments can damage their credit history. If you’re planning on making your child’s cell phone payments for them, make sure you make on-time payments every single month.

If you’re keeping your child responsible for paying their cell phone bill each month, make sure they understand why their credit history matters and the importance of making bill payments on-time. Let them know that their credit history is used to calculate a credit score. Good payment behaviour can improve their credit score, while skipping bill payments can do considerable damage. Even one late payment can decrease a consumer’s credit score by as much as 150 points, according to Borrowell data.

Will Adding My Child as an Authorized User Help Their Credit?

In Canada, adding your child as an authorized user to your credit card will not help them establish credit history. According to the Financial Consumer Agency of Canada (FCAC), adding an authorized user to your credit card will allow them to make purchases with your credit card. But because the authorized user is not responsible for making repayments on the account, any purchases an authorized user makes using the card won't help them build credit history.

You could add your child as an authorized user to teach them how to properly spend with a credit card and make regular payments. Note that most credit cards have minimum age requirements for individuals to be added as authorized users (usually ages 13-15). 

Of course, it’s up to you to teach your child how to use the credit card responsibly. Incorrect use of the card can be harmful to your own credit score. Before you add your child as an authorized user, make sure that they understand that a credit card is not a source of income and the repercussions that come with credit card misuse. 

What Other Credit-Building Options Are Available for My Child's Credit? 

Once your child reaches the age of majority, there are a few more options available to help them build credit from scratch. Some examples of financial products that can help them build credit include the following:

• Secured credit cards

• Credit builder loans

• Personal loans (like a car loan) 

Secured credit cards

If your child is unable to qualify for a regular credit card as a first time credit holder, then a secured credit card is a great start. A secured credit card is slightly different from an unsecured card. With a secured credit card, you will need to put down a deposit (say $500). You then have a credit limit for $500. The card will then work like a normal credit card to make purchases. You will also receive monthly bills to pay off, based on how much of your credit limit you spent with the card. 

Because secured credit cards involve putting down a deposit, they are often easier to qualify for than regular credit cards, especially if you haven’t built up any credit history yet. This is an easy way for your child to build credit and learn how credit cards work. 

Credit builder loans

Another handy tool to help build credit and learn more about money is to open a credit builder loan. A credit builder loan is not a cash loan, compared to a typical cash loan. 

In this case, the lender will open a secured savings account under the account holder’s name. The account holder will then make monthly payments into that account. Each payment into the account will be reported to the credit bureaus, allowing you to build a positive credit history. Your credit score should improve over time and, at the end of your credit builder loan term, you will receive your money back from the lender.

Personal loans

Making regular repayments on a personal loan can also help a borrower build credit history. If your child is building credit history from scratch, they may have limited loan options that they can qualify for. If they’re planning on getting a car for college, they may want to get a car loan with an affordable interest rate. To help your child out, you could co-sign a car loan with them.

A co-signer is usually a trusted friend or family member who agrees to be legally responsible to pay back a loan in full if the primary account holder defaults on payments. Keep in mind that being a co-signer for your child’s loan can impact your finances and credit score if your child has trouble making regular payments on time. 

Can a Child have a Credit Score?

Children under the age of 18 will only have a credit score if they have established some credit history by paying a cell phone plan in their name. Having them as an authorized user on your credit card will not help them establish credit, as any purchases they make using the card won't help them build your credit history. If they don’t have a cell phone plan, then they will have to wait until the age of 18 when some other credit building options become available to them.

Note that, in the case of identity theft, someone may have illegally opened a credit card in your child’s name. In this scenario, the credit bureaus may have established a credit file in your child’s name, which means they may have a credit score. Of course, this is not a good situation and is something that parents should keep an eye on. If you suspect that your child’s identity has been used to open fake credit accounts, contact Equifax and TransUnion as soon as possible to have them investigate your claim. 

How Can I Check My Child’s Credit Report?

Even if your child is not building credit, it’s a good idea to check their credit profile starting around age 16 just to be safe and ensure that everything is as it should be.

Credit reports can be ordered from either of Canada’s credit bureaus: Equifax Canada or TransUnion Canada. You can order reports from the credit bureaus by mail, fax, or over the phone for free. You can also choose to get your credit report online if you want to see it right away, however, this will come with a fee. 

If your child is 18 or above, they can check their credit score and download their Equifax credit report for free with Borrowell. They can sign-up using their smartphone, no credit card is required to sign up, and the process only takes about 3 minutes. This can be a more straightforward and less intimidating option than contacting the credit bureaus

Note that checking your credit score with a service like Borrowell or ordering your own credit reports from Equifax or TransUnion will not have an impact on your credit score. Keeping tabs on your credit profile is a healthy practice.

How to Teach Your Child Healthy Credit Habits 

Teaching your child healthy credit habits should start at a young age. Make money a family conversation and talk about the pros and cons of credit and how it works. 

You should teach your child that their credit score is used by lenders and other companies to assess their financial risk level. Their credit score and credit history could impact their chances of reaching certain goals, including:

• Getting a car

• Getting a loan or credit card

• Landing a job

• Renting their first apartment

• Buying a house 

Does your kid plan on getting a car when they’re older? Bad credit history could prevent them from qualifying for a car loan. Do they want to buy a house? Bad credit could squash their chances of getting a mortgage. Their credit history could also impact their chances of landing a job or renting their first apartment.

If your child is an authorized user on your credit card or is starting to use their own card, teach them the following financial habits to help them maintain good credit health:

• Make credit card payments on time

• Make payments in full, when possible

• Spend less than your credit limit

• Keep credit utilization low

Make credit card payments on time

Your payment history is the largest factor that impacts your credit score, so when teaching your kids about credit, emphasize that they need to pay their bills on time, every time, in order to maintain good credit health. Encourage them to organize their regular bill payments in a calendar each month, or help them set up automatic payments from a bank account so that they never miss a payment. Do the same thing if you are paying back a cell phone bill or other credit account in your child’s name. 

Make payments in full 

Encourage your teen to pay off their full balance each month. This is a great habit that will keep them out of debt later. Only making minimum payments on credit card bills each month will cause them to rack up a hefty amount of interest. This becomes a handful to pay back as time goes on, so encourage your children to be proactive and diligent with bill payments.

Spend less than your credit limit

If you’ve set your child as an authorized user on your credit card, teach them how credit limits work. You have a specific amount of credit that you can spend up to, but instruct your kids that you need to keep your balance well below that limit. Give your children a home-made limit that they can spend up to, but instruct them to keep their spending well below that limit.

Keep credit utilization low 

While teaching your kids about credit limits, you should also emphasize credit utilization, which is the second largest factor that impacts your credit score. Teach your kids that they should only spend 30% of the credit limit in order to maintain a strong credit score. If the credit card has a $1,000 credit limit, they should only spend up to $300 each month. 

Lead By Example 

Stress the importance of saving money for short and long term goals and show your child how to make a budget. Remember, part of your child’s learning will also be based on your own money management, so practice what you preach and be a good financial role model for your child to learn from.