Strong credit is essential for anyone who wants to apply for a credit card, car loan, apartment, and more. Learning how to build credit now will help teens in the future. The most important credit tips to share with teens include the factors that go into a credit score, how to read a credit report, understanding credit history, and ways to build credit.
- Teaching teens tips about credit will help them know how to manage it when they're an adult.
- A credit history provides a look at your financial habits and payment history.
- A credit score evaluates several factors—including credit history—to determine how likely you are to repay a debt.
- Teens can be added as authorized users of credit cards to help them start their credit journey, but they'll need to do more in the future to build their credit.
- A good credit score and strong credit history can help teens become adults who have easier access to lower interest rates on loans and more.
What Is a Credit Report?
A credit report documents someone's credit history from several sources, including financial institutions, credit card companies, collection agencies, and governments.
“Your credit report offers potential lenders and creditors a summary of your credit history,” said Chip Griffith, senior vice president of retail sales and operations for OneAZ Credit Union in Phoenix.
Your credit report includes such information as the lender’s name, the type of credit (such as a car loan or credit card), when the credit was issued, the credit limit, the current balance on the debt, and the payment history of the debt. A credit report also includes information on any bankruptcies and collection actions related to the borrower’s debt.
There are three credit reporting agencies that compile information on a credit report—Equifax, Experian, and TransUnion—and consumers can receive copies of those reports.
You can get a free copy of your credit report at AnnualCreditReport.com.
What Is a Credit Score?
A credit score is a three-digit number usually between 300 and 850 that provides a quick estimate of your credit risk. It's based on the information in a credit report.
“Your credit score is a quick glance for many businesses to show your spending habits and if you are ever late on payments,” Griffith said. “This will come into play for teens later in life when trying to buy large ticket items such as a car or house.”
As soon as your teen begins using credit, they will develop a credit report and a credit score.
There are many types of credit scores, but the two that are used most often are the FICO score and the VantageScore. They both range from 300 to 850, but the ranges in between may differ.
A credit score is calculated by evaluating five different categories: payment history, amounts owed, length of credit history, new credit, and credit mix.
Payment history is the single biggest factor when calculating a credit score. Missed or late payments will have a lasting negative effect on a credit score that could take months or years to reverse.
“Just one missed payment can stay on your credit report for seven years,” Griffith said.
He pointed out that a late payment may result in a late fee, but may not end up on the borrower’s credit report. A missed payment definitely will.
“If you ignore that late payment and it becomes a missed payment, that’s going to hurt your credit for years to come,” he said.
Teaching your teen to pay bills on time will help them get into the habit of never missing a payment. This can help them prepare for payments on credit cards, loans, mortgages, and more in the future—all of which will factor into their credit score.
How to Read a Credit Score
You can find your credit score through free sites like Credit Karma, but if you have a bank account or credit card, you may be able to find your credit score in your online account or on the mobile app.
Credit scores range from 300-850, and there are buckets in between those numbers that determine if your score is poor, fair, good, very good, or excellent. Here's how FICO scores and VantageScores are broken up:
|FICO Credit Score Range|
|VantageScore Credit Score Range|
For example, if you look up your credit score and see it is a 750, that means you are in the Very Good or Prime credit score range for both FICO and VantageScore. And let's say you want to apply for a personal loan through your bank. If your bank says that the lowest interest rates may apply to borrowers with a Very Good credit score or higher, then you would be eligible to apply and potentially secure a lower interest rate for that loan. Teaching your teen this early can help them know when they may be eligible for a line of credit or loan.
Why Is a Credit Score Important?
Teens can learn early on that building credit and having a credit score are necessary so lenders can determine whether or not to approve a loan or credit card application.
“When you go to buy a car or a house or even to rent some places, the lender will look to your credit score to ensure you have a history of paying your debt on time,” Griffith said.
Some employers also may check your credit score when applying for a job. And it’s common for insurance companies to check credit scores when determining car insurance rates.
How to Build a Credit Score as a Teen
When building a credit score, teenagers should start by learning healthy financial habits. This is a great time for teens to learn how to create and stick to a budget. Knowing how much money they have to spend goes a long way in helping them learn how to pay bills on time—a key factor in building a strong credit history and score. Once they start applying for and using credit, effectively budgeting their money can help teens stay on track with repaying that debt. Here are a few ways teens can start to build a credit score.
Start with a Debit Card
A good first step is having teens open a checking account that includes a debit card. Many financial institutions have a student checking account for this purpose.
“This can help teens learn effective budgeting and how to spend within their limits,” Griffith said.
Most debit cards don't help to build credit because the spending does not appear on a credit report. However, there are some debit cards that may help to build credit, but be sure you and your teen know how they work before signing up.
A debit card that doesn't help to build credit will still teach teens how to budget and manage money which is essential to building good credit for the long term.
Try a Credit Card
When your teen turns 18, graduates high school, or goes to college, there's a good chance they will receive a lot of credit card offers, so it’s important to educate them on this financial product before that happens. Start with a basic credit card or a secured credit card so they can learn how to manage their credit limit and budget payments, and learn how credit card interest and late fees work.
“Have them use this card for filling up their car with gas, if they’re of driving age, when they’re going out with friends, or link it to their favorite online store,” Griffith said. “They’ll get in the habit of purchasing and paying off those purchases.”
You may be able to add a teen as an authorized user to a credit card, too. While some financial experts recommend this approach, it's important to understand that the teen still needs to be responsible for their use of the card. Additionally, if the primary card user's credit score goes down, the authorized user could be impacted.
“Some parents are able to help their teenagers get started on building credit by adding them as an authorized user to their credit cards, but the teenager is piggybacking on the parent’s credit history and not building their own credit profile,” said Erik Beguin, CEO and founder of Austin Capital Bank in Austin, Texas. “When the teenager is removed as an authorized user, all of the parent’s credit history and impact on the teenager’s credit profile is eliminated.”
If you're thinking of adding a teen as an authorized user, first contact your credit card company to learn how it works and if it'll help the teen build credit or not.
Consider an Installment Loan
Taking out a loan for a purchase such as a car, computer, or gaming console is another financial product a teen could use to build credit.
“Some banks and credit unions offer loans specifically geared toward building credit,” Griffith said.
These loans provide a clear timeline for budgeting payments because they often have fixed monthly payments for a designated timeframe, like 12 or 24 months. The amounts are often lower too, like $1,000. Making on-time payments for a loan will go a long way in building credit and increasing the teen’s credit score.
Teens With No Credit History
One important caveat to building credit for teens: Minor teens are not legally allowed to take out credit cards or a loan on their own. Some financial institutions and credit card companies may allow a teen to have a co-signer on an application, but, even in these cases, the teen typically must be at least 18 years old.
“If they are 18 to 20, they must prove they have the ability to repay the credit card independently or get a co-signer with the ability to repay,” Beguin said. “Building credit from scratch takes time, but it is straightforward. Slow and steady wins the race.”
How Can I Establish Credit at 16?
Teens are legally unable to build their own credit until they are 18. However, at 16, they can start learning good financial habits such as budgeting and managing their money using a debit card on a checking account. It’s possible a parent may be able to add their teen onto a credit card or installment loan, which could help build credit.
What Builds Your Credit?
Applying for credit such as a credit card or an installment loan is the first step. Paying off that debt as agreed with on-time payments will help build good credit. Having a mix of credit—such as a credit card, car loan, and mortgage payment—can also help you build good credit.
What Do I Do if I Have No Credit History?
If you have no credit history, you may need to enlist a co-signer to help you qualify for a credit card or loan. Essentially, the co-signer’s credit history is used to evaluate the risk on the debt, so it’s important to find a co-signer with good credit and a record for making payments on time.
The Bottom Line
As teens move forward in life, they will need a good credit history in order to finance a car or house, purchase affordable car insurance, or possibly apply for a job. Therefore, it’s important for them to learn good budgeting and money management habits early, and use those habits to make on-time payments to pay off debt and build good credit. Teaching teens about money now will set them up for financial success in the future.
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Consumer Financial Protection Bureau, "What Is a Co-Signer?"