“Parents are Investing in Their Kids’ Financial Futures with Premium Credit Scores!”

A few years back, Hannah Case opted to investigate her individual credit history. At that time, Case was a researcher at the Federal Reserve and did not acquire her first credit card until she was 22. However, upon discovering her file, she realized she had been spending prudently since the age of 14. After exploring how this was possible, she found out that her parents had designated her as an “authorized user” on their credit card. This action contributed her parents’ spending and payment behaviors to her credit history as well—and likely provided Case with an initial credit score that, as she remembers, was already “relatively high.”

Credit scores are designed to serve as impartial indicators of one’s financial reliability, but in reality, they are a straightforward method for financially stable families to give their offspring an early financial advantage. A variety of services claim to assist parents in ensuring their children start adulthood equipped with favorable scores. On TikTok, “generational wealth” influencers highlight the advantages of authorized usership. Start-ups in fintech, such as Greenlight and GoHenry, guide parents on cultivating a credit history for their children. Furthermore, financial entities like Austin Capital Bank pledge to enhance children’s future credit scores through programs that enable parents to authorize the bank to withdraw and automatically settle loans in their child’s name.

Read: Can the flaws in credit scoring be repaired?

Numerous parents are utilizing these resources. In a 2019 survey commissioned by the consumer-financial-advice site CreditCards.com, 8 percent of the approximately 1,500 American parents surveyed indicated that at least one of their minor children possessed a credit card—most likely through authorized usership, since minors under 18 cannot possess a credit card independently. Additionally, data from TransUnion revealed last year that nearly 700,000 individuals aged 22 to 24 had authorized-user accounts. Attempting to build credit for children prior to their high school graduation isn’t fundamentally new. However, as wages remain stagnant and homeownership becomes increasingly elusive for many, “financial stability has become more intricate and precarious for young adults,” Ashley LeBaron-Black, a family-life professor at Brigham Young University, explained to me. “Parents are aware of this, and are attempting to equip their children.”

Currently, your score influences not just your ability to secure a credit card or a loan. It acts as your access key to effective participation in society, affecting the job or apartment you can secure and the costs you might face for car insurance or security deposits. However, not everyone is positioned to achieve a favorable score. Research on this subject is scant, yet the experts I consulted indicated that credit scores are closely intertwined with race and inherited wealth—specifically, who possesses a legacy of wealth in their family and who does not—and that the discrepancy between individuals with good scores and those without can begin to emerge while individuals are still quite young. Eighteen- to 20-year-olds from predominantly white communities commence with credit scores that are 24 points higher than those from predominantly Black communities, as found by a report from the Urban Institute, a nonprofit research institution. (The study did not address the affluence of these communities, but on average, white households tend to possess more wealth than Black households.)

This inequality intensifies with age. In 2021, Black Americans recorded a median credit score of 639, in contrast with 730 for white Americans and 752 for Asian Americans. (The pinnacle score is 850.) Furthermore, another study discovered that individuals in the lowest income bracket had an average credit score more than 150 points lower than their highest-earning counterparts. Credit scores serve as yet another mechanism for “a significant degree of economic inequality, disparity, and generational-wealth gaps to be further encoded and perpetuated,” Yeshimabeit Milner, the founder of the advocacy group Data for Black Lives, expressed to me.

Calculating credit scores involves complex processes. Algorithms utilize a report encompassing details about all of your financial accounts and loans, along with any bankruptcies. Certain factors, such as a lengthy record of timely debt repayments, correlate with higher scores. In contrast, other elements, including missed payment deadlines or limited credit history, can cause scores to dip. For younger individuals, this implies that achieving a satisfactory score may feel distant. Most individuals in their early twenties will naturally have a brief history; you cannot even generate a score until you turn 18. Nevertheless, becoming an authorized user allows one to start establishing their record early.

Read: An often-missed route to a financial restart

The system, which the Federal Reserve Board implemented in 1975, was initially designed not for minors, but for married women, who…until the prior year had been unable to obtain their own credit cards. To ensure that these women’s prolonged spending and payment records wouldn’t be overlooked, the Federal Reserve mandated that they could retrospectively incorporate a portion of their husband’s credit history. Unintentionally, this decree also opened up possibilities for some children. Currently, two of the prominent credit reporting agencies, Experian and Equifax, advise authorized usership as a means to enhance your report, and FICO, the analytics firm that develops the nation’s most widely used credit-scoring algorithm, confirmed to me that being an authorized user “can assist those who are new to credit in beginning to establish a credit history.” The organization did not specify how significant the impact is, but one study revealed that individuals across various ages with limited credit histories experienced a score rise of 22.4 points after they were included as authorized users.

Certainly, authorized usership, like many of the most effective methods to cultivate credit early on, depends on one’s parents having a high score; inheriting someone else’s unpaid obligations will damage your report. Similarly, utilizing a co-signer to secure a quality credit card, as 3.7 percent of young Americans do, is an alternative—but it’s only accessible to those whose parents have solid credit histories. Case, the former Federal Reserve analyst, discovered that 18-to-20-year-olds with co-signed cards had scores nearly 50 points higher than those who opened accounts independently (although this could be partly due to the co-signees also tending to originate from more affluent census regions). Independently, once children reach 18, they can obtain what is referred to as a “secured” credit card by placing an initial cash deposit. However, that does little to enhance their report in comparison to what “being an authorized user on an American Express gold card could ever achieve,” Milner stated.

Although young adults’ credit scores frequently correlate closely with their parents’ scores, numerous institutions regard credit scores as personal indicators of financial acumen and character. “There’s this perception that somehow your credit score indicates how responsible and moral a person you are,” Chi Chi Wu, a senior attorney at the National Consumer Law Center, shared with me. Employers examine credit reports to assess an applicant’s ethics, and some fleeting dating apps even vowed to accept only individuals with high scores. In actuality, however, your score does not represent your moral integrity. It’s easier for those with a financial safety net to fulfill payments, and more challenging for those without that flexibility—especially if they hold a lower credit score and incur higher charges for items such as auto loans and home mortgages. “It’s just a vicious cycle,” Wu explained to me.

Many individuals likely don’t consider all of this when they clear their credit card balances monthly. However, Case’s investigative background has led her to be more aware of how credit scores determine who gains access to the American financial landscape and the interest levels they need to pay for the privilege. It’s difficult to trace the reasoning behind her credit journey (or anyone else’s), because the entire system is opaque, she disclosed to me. She can’t ascertain how much of a boost being an authorized user provided her. What she does understand is that she faced no difficulties obtaining her first credit card or successfully passing her initial landlord’s credit check—obstacles that frequently impede those with low or nonexistent credit scores. She might have just been beginning her journey, but fair or not, she was already a step ahead.