The Financial Lady is a passionate advocate for financial literacy, I’m excited to share some valuable insights with you in this week’s blog. Today, we’ll delve into piggybacking when building your child’s credit. While it may sound like an easy route to help your child establish credit, it’s essential to understand the pros and cons to make an informed decision. So, let’s explore this topic and equip you with the knowledge you need to make the best financial choices for your little ones. I did the same process with my husband when we married, and I got his credit score to 700 in a year!
What is Piggybacking?
Piggybacking, in the context of credit-building, refers to a strategy where a parent adds their child as an authorized user on one of their credit cards. By doing so, the parent’s credit history and behavior are incorporated into the child’s credit report. The intention is to give the child a head start in establishing a positive credit history.
The Pros of Piggybacking
Early Credit History: One significant advantage of piggybacking is that it allows your child to have a credit history at an early age. This can be instrumental when they eventually seek loans, credit cards, or even rent an apartment.
Build Credit Score: As an authorized user, your child benefits from the positive aspects of your credit history, such as timely payments and low credit utilization. This can lead to an improved credit score over time.
Education Opportunity: By involving your child in financial matters and responsible credit usage, you offer them an invaluable education on personal finance.
Supervised Learning: Piggybacking lets you closely monitor your child’s credit activity, allowing you to guide and intervene when necessary to prevent financial mishaps.
The Cons of Piggybacking
Credit Risk: Piggybacking also carries certain risks. If the parent’s credit behavior deteriorates, it can negatively impact the child’s credit score, even if the child is not directly responsible for the account.
Lack of Control: The child has no control over the account as an authorized user. Ensuring responsible credit usage is essential by regularly monitoring the performance and maintaining open communication.
Dependency: Relying solely on piggybacking might hinder the child from developing their own financial responsibility and money management skills.
Credit Score Limitations: While piggybacking can positively affect credit scores, it may only sometimes provide a comprehensive credit history, potentially limiting certain credit opportunities.
Alternatives to Piggybacking
Secured Credit Cards: Secured credit cards are a great way for young adults to build credit independently. These cards require a cash deposit as collateral, which serves as the credit limit.
Co-Signing: DON’T DO IT!
Credit Builder Loans: Some financial institutions offer credit builder loans that allow your child to establish credit by making small monthly payments contributing to a savings account. Once the loan is paid off, they can access savings and an improved credit score. CHECK YOUR LOCAL CREDIT UNION!
Key Considerations
Communication: Before piggybacking or exploring alternative credit-building options, have an open and honest conversation with your child about financial responsibility and the importance of credit.
Credit Education: Equip your child with knowledge on how credit works, the significance of on-time payments, and the impact of credit utilization on credit scores.
Monitor Credit Reports: Regularly check both your child’s and your credit reports to identify any discrepancies or potential issues that need addressing.
Practice Responsible Credit Use: Regardless of the method chosen, instill the importance of responsible credit usage in your child from an early age.
Building your child’s credit is an essential aspect of their financial future, and piggybacking can be a helpful strategy if approached with caution and understanding. Please weigh the pros and cons carefully, exploring alternative methods if necessary. Remember, the key lies in fostering financial responsibility, education, and open communication with your child throughout their credit-building journey.
This blog has shed light on the world of piggybacking and provided you with the necessary tools to empower your child’s financial future. Here’s to raising financially savvy individuals and securing their path to a prosperous tomorrow!
Be aware, be informed!