Teens & Credit: How to Establish A Good Credit Score as a Teenager

Girl in a pink sparkly prom dress with a wrist corsage of flowers and credit cards.

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Are you wanting to help your teenager establish a good credit score? Teenagers & Credit Scores is a great topic to be concerned about. Raising money-smart teens is more than just teaching our kids to work and earn and save and spend carefully. We need to teach teens the ins and outs of borrowing money and being smart about credit.

Question about Teenagers & Credit Scores

I was wondering if you don’t use any credit cards, how did you establish your credit history?  My son is 17 years old and I would like to tell him to only get an American Express (which he has to pay off each month) when he becomes an adult so he can establish a credit history.  Then, when he decides to purchase a house, he can do so with a lower interest loan that comes with good credit (now they are stipulating a FICO score of over 700 or 720). However, if there is a way for him to avoid getting a credit card altogether and he would still be able to get a mortgage, I would obviously prefer this method.  Could you please advise?

Answer: How to Establish A Credit Score For a Teen

You pose an excellent question.

We never had a credit card and had no problem borrowing money for a home. We put 15% down and borrowed much less than the bank would have let us borrow. Later when we went to refinance, it still was no issue. You don’t need a long credit history to borrow responsibly.

That was good enough for us, but we’ve decided to do something a little different for our kids.

Helping our own teenagers establish credit scores

We’ve helped them establish credit by getting a student credit card (we don’t like the idea, but we know how the credit score system works).

You need to know the rules and play by the system, but you don’t need to get totally sucked into the debt-laden lifestyle. Most banks offer a free credit card (no annual fee).

Daughter Becky only used it for her gas purchases and has it automatically paid out of her checking account each month.

Other Things You Can Do to Help Your Teen Establish a Good Credit Score

  1. Encourage your teen to get a job. They will be more interested in making and managing money if they work for it. It also teaches them responsibility and punctuality. Read this article and great summer jobs for teens.
  2. The Basics of Credit. Talk about the the pitfalls of borrowing. Things like what interest is, late payment penalties, and amortization schedules.
  3. Debit vs Credit. Teach them the differences between:
    1. Debit Cards — the money comes directly out of your checking account … immediately) and
    2. Credit Cards — You spend someone elses money. You don’t have to pay for 30 days. If you don’t pay in full you have to pay some interest.
  4. Open a Bank Account.  Teaching them the ins and outs of balancing a checking account, using a debit card, and writing checks all contribute toward financial maturity.
  5. Consider Letting Your Teen Pay a Household Bill. This is a wild idea, but having a cell phone bill or cable bill in your teen’s name can build a payment history for them. Recurring bills, paid on time reflect well on a credit score.
  6. Add Your Teen As an Authorized User on Your Credit Card. This should only be done if your teen is financially responsible. But adding them to your account will also help build their credit score.
  7. Get Your Teen A Secured Credit Card. These types of cards can be put in your teen’s name. They make an initial deposit, say $500. This becomes their credit limit. The $500 is held as collateral. Then he or she uses the card to demonstrate expenses can be handled and payments made on time.
  8. Apply for a Student Credit Card. Most student cards give students who are 18 years or older and enrolled in a two- or four-year college the chance to build credit. Some even let them earn rewards and receive student-centric benefits.

What Are the Components of A Credit Score

FICO Credit Score Components

Remember that some of the components that make up your credit score are:

  1. Length of Credit History: How long you’ve had the line of credit
  2. Payment history: do you always pay on time
  3. Amount of Debt: available credit you are using (never use more than 50%)
  4. New Credit applications: How often are you applying for loans or borrowing money from other sources.
  5. The Mix of types of credit: Car loans, student loans, credit cards, department store cards, etc.

The results of this credit-building strategy for our kids

Because our daughter Becky has had a credit card for several years, always paid on time, and has never used more than about 5 percent of her available credit, her credit score is around 800.

Becky hasn’t applied for a home loan yet, but her goal is to have enough cash to put down that her credit score will be of little consequence.

If you help your kids learn to manage money at a young age and help your teenagers understand the credit game, they can establish a great credit score without paying any interest.

We wrote about this and many other teen money issues, including how to save money on college expenses in our award-winning book, “The MoneySmart Family System, Teaching Financial Independence to Children of Every Age.” You can learn more about the book, and watch some interviews with our kids and us on this page.

Teenagers & Credit Scores: how to help them establish good credit!

One thought on “Teens & Credit: How to Establish A Good Credit Score as a Teenager

  1. Jennifer

    I agree that there are ways to live where your credit score has no effect on your spending/borrowing power, but having a good credit history makes life much easier even when you aren’t borrowing a ton (or even any) money. It helps getting approved for things like apartment rentals, gets you a better price on auto insurance, and much better interest rates when you do take out a loan. I got my first credit card when I was 18, and followed all the rules to build good credit. I kept a low balance for the first six months, and paid my minimum payment on time each month. Once I knew that the credit card company had had enough time to report to the credit bureaus, I paid off the balance and only used my card occasionally, paying off any balance at the end if the month. When my husband and I bought our first home, the bank insisted my name go first on the mortgage because, even though he had gotten small loans and had an excellent payment history, my credit score was higher and my history was longer. After nearly 17 years of marriage, having combined finances the entire time, and me being a stay at home mom for 15 years, my credit score is still higher. We recently purchased a new house, and my name still had to come first on the mortgage!

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