Parents Are Gaming Their Kids’ Credit Scores
Several years ago, Hannah Case decided to examine her personal credit history. Case, who was then a researcher at the Federal Reserve, hadn’t gotten her first credit card until she was 22. But as she discovered when she saw her file, she’d apparently been spending responsibly since 14. After looking into how that could be, she learned that her parents had added her as an “authorized user” on their credit card. That made their spending and payment habits a part of her credit history too—and likely gave Case a starting credit score that was, as she recalls it, already “fairly high.”
Credit scores are meant to be neutral measures of someone’s financial reliability, but in practice, they’re an easy way for some better-off families to give their children an early financial advantage. A range of services promise to help parents ensure that their kids enter adulthood armed with good scores. On TikTok, “generational wealth” influencers tout the benefits of authorized usership. Fintech start-ups, such as Greenlight and GoHenry, advise parents on establishing a credit history for their children. And financial institutions such as Austin Capital Bank promise to improve children’s future credit scores with programs that allow parents to authorize the bank to take out and automatically repay loans in their child’s name.
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Many parents are taking advantage of these tools. In a 2019 poll commissioned by the consumer-financial-advice website CreditCards.com, 8 percent of the roughly 1,500 American parents surveyed said that at least one of their minor children had a credit card—presumably through authorized usership, because kids under 18 can’t get their own credit card. And data from TransUnion last year showed that nearly 700,000 22-to-24-year-olds had authorized-user accounts. Trying to build credit for kids who haven’t graduated from high school isn’t necessarily new. But as wages stagnate and homeownership slips out of reach, “financial well-being has become more complicated and more precarious for young adults,” Ashley LeBaron-Black, a family-life professor at Brigham Young University, told me. “Parents recognize that, and are trying to prepare their kids.”
These days, your score doesn’t just determine your access to a credit card or a loan. It is your passkey to successful participation in society at large, influencing what job or apartment you can get and how much you might pay for car insurance or a security deposit. But not everyone is set up to receive a good score. Research on the topic is scant, but the scholars I spoke with told me that credit scores are closely tied to race and intergenerational wealth—specifically, who has a legacy of wealth in their family and who does not—and that the gap between who gets a good score and who doesn't can start forming when people are still young. Eighteen- to 20-year-olds from white-majority communities start out with credit scores 24 points higher than those from Black-majority communities, a report from the Urban Institute, a nonprofit research organization, found. (The paper didn’t mention the affluence of those communities, but on average, white households are wealthier than Black ones.)
This disparity deepens as people get older. In 2021, Black Americans had a median credit score of 639, compared with 730 for white Americans and 752 for Asian Americans. (The maximum score is 850.) And another paper found that people in the lowest income bracket had an average credit score more than 150 points below that of their highest-earning peers. Credit scores are another way for “a lot of economic inequality, disparity, generational-wealth gaps to just be further encoded and passed on,” Yeshimabeit Milner, the founder of the advocacy group Data for Black Lives, told me.
Calculating credit scores is complicated. Algorithms draw on a report that includes information about all of your financial accounts and loans, as well as any bankruptcies. Some factors, such as a long record of repaying debts on time, are associated with higher scores. Others, including a failure to meet payment deadlines or a short credit history, can nudge it down. For young people, this can mean that a good score might seem far-off. Most people in their early 20s will inherently have a short history; you can’t even get a score until you’re 18. But authorized usership lets you begin building your report early.
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The mechanism, which the Federal Reserve Board introduced in 1975, was originally intended not for children, but for married women, who until the previous year hadn’t been able to get their own credit cards. In an effort to ensure that these women’s long spending and payment histories wouldn’t be invisible, the Federal Reserve ruled that they could retroactively assume part of their husband’s credit history. Inadvertently, this ruling also opened the door for some kids. Now two of the major credit bureaus, Experian and Equifax, recommend authorized usership as a way to improve your report, and FICO, the data-analytics company that produces the country’s most popular credit-scoring algorithm, confirmed to me that being an authorized user “can help those who are new to credit start establishing a credit history.” The company didn’t specify how much of a difference it makes, but one study found that people across the age spectrum with short credit histories saw their score increase by 22.4 points after they were added as an authorized user.
Of course, authorized usership, like many of the most effective ways to build credit young, works only if one’s parents have a high score; inheriting someone else’s unpaid debts will hurt your report. Similarly, using a co-signer to get a good credit card, as 3.7 percent of young Americans do, is another option—but it’s available only to those whose parents have strong credit histories. Case, the former Federal Reserve researcher, found that 18-to-20-year-olds with co-signed cards had scores nearly 50 points higher than those who opened accounts by themselves (though that may be in part because the co-signees also tended to come from wealthier census tracts). On their own, once kids turn 18, they can get what is known as a “secured” credit card by making an upfront cash deposit. But that does little to build their report compared with what “being an authorized user on an American Express gold card could ever do,” Milner said.
Even though young adults’ credit scores often dovetail closely with their parents’ scores, many institutions treat credit scores as personal measures of financial savvy and character. “There’s this idea out there that somehow your credit score is a marker of how responsible and moral of a person you are,” Chi Chi Wu, a senior attorney at the National Consumer Law Center, told me. Hiring managers study credit reports to evaluate an applicant’s ethics, and some short-lived dating apps even pledged to accept only users with high scores. In reality, however, your score does not reflect your virtuousness. It’s easier for those with an economic cushion to meet payments, and harder for those without that wiggle room—especially if they have a lower credit score and are charged more for things such as car loans and home mortgages. “It’s just a vicious cycle,” Wu told me.
Many people probably don’t think about all of this when they clear their credit-card balances each month. But Case’s research background has prompted her to be more attentive to the ways in which credit scores shape who has access to the American economy and how much interest they must pay for the privilege. It’s hard to trace the logic behind her credit experience (or anyone else’s), because the whole system is opaque, she told me. She can’t know how much of a boost being an authorized user gave her. What she does know is that she didn’t have a problem getting her first credit card or passing her first landlord’s credit check—hurdles that often hold back people with low or nonexistent credit scores. She may have just been starting out, but fair or not, she was already a step ahead.