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How Do I Build Credit?

The catch-22 of credit for young adults is that you can’t get a credit card because you don’t have a credit history but you can’t build credit because you can’t get a credit card!!  And in today’s world, credit cards are a fact of life.  You need a credit card to do a number of things including making a hotel or airline reservation or renting a car.  To add to the conundrum, it’s more difficult for young adults under the age of 21 to get a credit card on their own since federal law now requires credit card issuers to verify personal income before granting a credit card.  So, how does a young adult go about building their credit history via credit card use?

There are two primary approaches:

  1. Adding an authorized user to the account of a parent
  2. Establishing a secured credit card account

Many credit card companies allow the addition of a child to one of your credit cards as an authorized user with relative ease.  Your child does not need to go through a credit check to be added to the card although some companies may charge a small fee to do so.  The child/young adult will receive a credit card with their name on it and can use the credit card for purchases just like the primary account holder.  All the purchases are processed against the same account and appear on one statement.  Both users share the credit limit so purchases by your child reduce your available credit limit.  However, the authorized user is not legally responsible for purchases made on the account – you are!  But, they can only make purchases – they cannot request cash against the card, change the address of record, add other users, etc.

Most credit card companies issue a separate account number to the authorized user, even though it is still just one account.  With this structure, the credit card company can report the credit history associated with the authorized user to the 3 major credit bureaus so your child can begin to build a credit history.  You just need to make sure, before you add the user to your account, that the credit card company will report the authorized user’s purchase and payment activity to the bureaus separately.  Given that there is only one statement, you also have the ability to closely monitor the activity on the card and make sure your child pays their share of the purchases each month.  Asking them to provide receipts for all of their purchases at month end is a good idea.

Secured credit cards are commonly used to build credit for new credit card users.  They require the account holder to deposit cash as collateral for the amount of the credit line.  They typically have low credit limits and higher fees and higher interest rate charges than an unsecured credit card, so it is a good idea to shop around for one before applying.  Also, make sure the credit card company will report your child’s payment history to the major credit bureaus.  A list of banks offering secured credit cards can be found at  A couple of companies to consider include Capital One and Discover.

Secured credit cards can be upgraded to unsecured credit cards in approximately 1 year, assuming a consistent payment of the monthly balance.  You typically do not want to keep a secured credit card any longer than you have to given the higher fees.  Also, banks do not pay interest on the deposited funds and may keep the money on deposit for a couple of billing cycles after termination to cover any stray charges.  Secured credit cards are different than prepaid cards in that when you make purchases against your secured credit card, it’s not deducted from your deposit.  You need to pay off the balance every month.  Another key difference is that activity on prepaid cards is not reported to the credit bureaus.

Written by

Mark F. Kleespies, CFP®

Mark joined THOR in January of 1997, and is the head of the Wealth Management team. His primary duties include working directly with clients and strategically planning the direction of the firm. Mark is a member of the Financial Planning Association and is a Certified Financial Planner.

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