How to help your kids improve their credit score

As an adult you know just how important maintaining a positive credit history and good credit score is. But when it comes to your kids, you may be wondering if there’s anything you can do to give them a leg up.  

Whether you want to teach your kids good financial literacy early to help avoid bad credit pitfalls, or give their potentially below-average score a boost, there are a few options available to help improve a child’s credit score.

Help your kid’s financial literacy before they’re 18

In Australia, having a credit history and being assigned a credit score does not occur until you turn 18. So, if you’re hoping to give them the best start in life financially it may be worth prioritising the development of their financial literacy.

By developing a strong understanding of personal finance before they’re ever eligible to sign up for their first credit card, you may be able to help your kids to avoid accumulating debt, default or bankruptcy.

There are a range of methods that a parent can use to teach their kids good financial literacy skills, including:

• Piggy bank apps

For your tech-friendly little ones, electronic piggy banks are a type of fintech that may help little minds understand things like managing an account, setting savings goals, tracking spending, and transferring funds between accounts. 

There are a range of apps that may offer visual learning tools and fun sound effects so, for example, they may picture their savings goals and feel rewarded when they meet them.

• Open a children’s savings account

Opening a savings account for your child is another option that may help to develop their financial literacy skills. By depositing regular pocket money/chore money into the account you may teach them about earning an income as an adult. 

You can also teach them about budgeting by demonstrating the benefits of spending a little now and saving some pocket money for a bigger goal. Finally, you can teach your kids about more complex terms like compound interest as the account earns interest. 

Ways you may improve your kids credit score

Let’s skip the obvious advice of “don’t take on more debt than you can manage” and “don’t make multiple applications at once”. For your adult-aged kids, there are a range of practical steps you may want to consider taking to help develop their credit history and potentially boost their credit score.

• Utilities bills and phone plans

Young Australians may struggle to get approved for financial products like a home loan or a credit card if they’ve not yet developed a credit history. And one of the easiest ways a parent can assist them is to help them take on some responsibilities.

A lower-risk option is to simply add the kid to a utilities bill, as having your name on an energy or gas account, for example, will show up on an individual’s credit history. You may also want to consider encouraging them to start their own mobile phone plan. These are more accessible ways they can develop a credit history. By ensuring regular payments are being made and late payments are avoided, this positive information may increase their credit score. 

• Help them repay small debt

A more hands-on option you may want to consider is to help your kid repay a small loan, such as a used car loan. If this is a financially viable option for you, it could help them to have one repaid debt on their credit history and may boost their credit score.

If you were feeling very generous, you could help them pay off the loan in full, then have them pay you back for the total value of the loan (with or without interest – your prerogative). This option may be preferred for those who’d rather have their kid owe them money than a bank, who may charge a high interest rate on the loan.

• Authorised card users

If you have a credit card, you may also want to consider adding your kids as authorised users on the credit card. They will be able to make purchases (which will accrue interest) but you will still be the primary cardholder and responsible for making repayments on the card balance.

The added authorised users will be able to benefit from having another credit product added to their credit history, including the length of time you’ve had the card account open. A long, positive history with a credit product is one way to not only develop a credit history but improve a credit score.

This is a riskier option as if your kid maxes out the credit limit or puts you in a position where you cannot afford to pay off the card balance, this may create some financial stress. It may be best to consider this if you trust that your kid has both the income to help repay their share of the spending, and the self-control to not go overboard.