WSJ Your Money Briefing - How Some in Gen Z Enter Adulthood With High Credit Scores

Episode Date: July 23, 2024

More teens are entering adulthood with an established credit history after spending years as authorized users on their parents’ accounts. J.R. Whalen is joined by WSJ personal-finance reporter Oyin Adedoyin, who explains the pros and cons. Sign up for the WSJ's free Markets A.M. newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

Your mom hates it when you leave six half-full glasses on your nightstand. It's a good thing mom lives on the other side of the country. And it's an even better thing that you can get six IKEA 365 Plus glasses for just $9.99. So go ahead. You can afford to hoard because IKEA is priced for student life. Shop everything you need for back-to-school at IKEA today. Here's your Money Briefing for Tuesday, July 23rd. I'm J.R. Whelan for The Wall Street Journal. Members of Gen Z are more likely to have enlisted as authorized users on their parents' credit cards. And in many cases, that's given them a head start in tackling some of the financial

responsibilities of adulthood. Let's say a kid is signed up as an authorized user at 13. If that parent never misses a payment on their account and they keep the utilization low, that kid could have over 10 years of good credit history by the time they graduate college. We'll talk to Wall Street Journal personal finance reporter Oyen Adedoyen. After the break. Shop Best Buy's ultimate smartphone sale today. Get a Best Buy gift card of up to $200 on select phone activations with major carriers. Visit your nearest Best Buy store today. Terms and conditions apply. More parents are adding their children to their credit card accounts.

Wall Street Journal personal finance reporter Oyen Adedoyen joins me. Oyen, why are parents doing this? They're basically adding their children as authorized users on credit cards that they already have. And so this enables them to, in some cases, receive a separate card with their child's name on it that they can choose to either give to them or hold on to while they build their credit. This is something that's really becoming a lot more common. More than 690,000 22 to 24-year-olds had an authorized user card attached to their file last year. That's compared with 285,000 consumers who were the same age a decade ago. And that's data from TransUnion. At what age are they first getting access to credit?

Well, interestingly, it depends on the credit card issuer. Some issuers and banks don't have an age limit. So you can sign your kid up for an authorized user card as early as... There's no age limit? No age limit. So you can pick what year you want to sign that kid up. Three, four, five years old? Some parents have done it.

want to sign that kid up. Three, four, five years old? Some parents have done it. Other cards have an age limit and that can range anywhere from 13 years old to 16 years old. Most banks don't report the information of an authorized user to credit bureaus until that kid is 18. Why are parents enrolling their teens now as authorized users instead of them applying later when they might have a more steady income. Parents are really doing this for kids to give them a head start in their credit history. So let's say a kid is signed up as an authorized user at 13. If that parent never misses a payment on their account and they keep the utilization low, that kid could have over 10 years of good credit history by the time they graduate college. And that's going to help them get more credit card accounts with higher limits and other rewards and other perks. So the parent's credit profile is important here. Yes, exactly. The kid gets to

essentially piggyback off of the parent's credit. That's pretty good for them to burst onto the scene when they're 18 and have a fully established credit profile. That's why a lot of parents are doing it. Part of the reason is, of course, to also have some kind of emergency spending for kids. But the other added benefit is by the time they're old enough to establish their own accounts, they've got a little bit of a head start in that way. What if the parent's credit score is low or they're struggling to keep it up? So that's the other side of things. And a lot of credit counselors worry about this when it comes to authorized users. Just as a parent's good credit can help their kid, a parent's bad credit could negatively affect their kid's credit score. Let's say a parent starts out with good

credit, but then they have a series of missed payments, and maybe their utilization increases for some reason, maybe expenses start to increase. That could ding their kid's credit score as well. If that happens, could the teen request to be taken off the authorized user list? Yes, they could. They could call their bank and see if they could remove themselves as an authorized user in that case. and see if they could remove themselves as an authorized user in that case. You know, having a credit card as a teen might give them a financial head start, but are there risks to a young person having the ability to make purchases just by pulling plastic out of their wallet and somebody else paying the bill? There are some risks.

I mean, it's really hard to get around these days without a credit card. More than 80% of adults had a credit card last year, and 65% of adults who had a credit card were between the ages of 18 and 29, according to the Federal Reserve. So it's a lot more common to have a credit card, especially at a younger age these days. But let's say you were a kid who was an authorized user on your parents' credit card, and so you're able to qualify for a credit card with a much higher limit than you're used to. Some financial advisors worry that that could incentivize that kid to spend more than they can afford. If a young person has built up a high credit score because of their parents' spending habits, how does that benefit them when they enter adulthood?

It could be really helpful. So a high credit score could help you be approved for an apartment a lot faster. It could help you get a more competitive interest rate on an auto loan or even a mortgage. I've talked with parents who were authorized users when they were younger, and they've said that it really improved their credit score and it helps them qualify apartments, for 4% or lower interest rates on mortgages, and for other things too, like car loans. So they're doing it because they saw the benefit it had for them when they were younger, and they want that same benefit for their child. Why are members of Gen Z more likely to be added as an authorized user than previous generations? It's a lot harder to get around today without access to credit. In some cases, people are charging customers who want to pay in cash. So for a lot of parents, this is a way to extend a little bit of freedom to their kids and give them the opportunity to still go out and spend while also being able to monitor that activity. I've spoken with some parents who impose credit limits

when they do give their teens these credit cards. And that allows you from your phone to see exactly what your kids are spending money on, how much they're spending, and potentially cut them off if they're spending too much. So what questions should a parent ask before letting their teen have access to credit? For one, they should see if there are any age minimums associated with putting their kid on as an authorized user with their bank. They should also check their own track record, make sure that they've got no missed payments on that credit card, make sure that their utilization is pretty low so that it can actually benefit their kid later on instead of harm them.

And this is kind of a real world lesson for these teens in personal finance, really lessons they might not have experienced it till maybe later in their 20s. It's really an opportunity for financial literacy for a lot of parents. I spoke with one mother who is getting ready to put her 17-year-old son on as an authorized user, but she wants to make sure that he takes an online financial literacy course so that at the same time that he has access to this card, he also is having access to the financial information in real time to be able to use it properly. And she doesn't plan on giving him this card anytime soon, but once he turns 18 and is able to get his own account started,

she feels like he'll then be equipped with the knowledge that he needs. That's WSJ reporter Oyen Adedoyin. And that's it for your Money Briefing. This episode was produced by me, J.R. Whelan, with supervising producer Melanie Roy. Thanks for listening.