For many teenagers, credit may seem like some far-in-the-future adult issue and be of little current concern. But just like starting to save and invest early puts time on your side, Austin Capital Bank estimates that the total value of establishing a strong credit profile at a young age could be greater than $200,000 over a lifetime, so establishing and managing credit responsibly as a teenager could provide a tremendous financial boost.
Whether you’re a teen looking to start your own credit journey or a parent wanting to give their child a leg-up on building credit, this guide will help by answering some crucial questions:
- Why is building credit before adulthood so important?
- How to build credit as a teenager
- How can parents help their children establish a strong credit profile?
Benefits of Building Credit as a Teenager
While you can get your first FICO® credit score six months after you start using loans or credit cards, it typically takes years to build a strong credit profile. Starting early is not only a sign of financial responsibility but also a major head start that allows you to:
- Get future loans more easily and with better terms
- Secure jobs requiring a good credit profile
- Rent or buy your desired apartment
A High Credit Score Makes You a Reliable Borrower
Credit scores were developed to help lenders reduce risk and avoid doing business with unreliable clients. Your credit score directly represents the probability you will not default on a loan, which is necessary for obtaining credit on good terms.
Whether you want to pay for a new phone in installments or get a car loan, you’ll need a solid credit profile. Otherwise, you may have to put down hefty deposits or go with expensive loans factoring in the risk of defaults. In extreme cases, you may not qualify for a loan at all.
By starting to build credit in your teens, you can set yourself up for a more financially stable future. A good starting score can help you get new loans with lower interest or longer repayment periods. A financing product like that is easier to manage, so you can play to the snowball effect and use it to keep growing your credit score, which will help you secure even better terms down the line.
Good Credit Helps You Pass Background Checks With Flying Colors
Employers in many industries do credit checks and use the results as disqualifying factors when hiring. You need a good credit profile to land a job in various fields, most notably:
- Financial planning
- Banking and finance
- Accounting and bookkeeping
- Law enforcement
- Armed forces
While it’s not impossible to land the above jobs without a strong credit profile, candidates with good credit will have a significant advantage. As the length of your credit history plays a significant role in your profile, starting in your teens is an excellent way to maximize your credit profile and secure your dream job.
Your Credit Profile Can Make or Break Your Living Situation
According to research by the National Association of Realtors (NAR), an average first-home buyer is 36 years old. While it may seem far from your current age, you should make every year count and use it to improve your credit score. If you do, securing a mortgage at favorable terms will be much easier.
In the meantime, you’ll likely rent for at least some time. Landlords almost always check a potential tenant’s credit profile and credit score as it gives them an idea of their financial standing and reliability. If there are no red flags, the landlord will see you as more trustworthy than someone with dents in their credit history.
While a good credit score might not impact the rent directly, it might lower the deposit and get you a longer-term contract. You’ll have peace of mind while getting ready to buy your first home.
How Can Teens Build Credit? Four Steps To Follow
As a teen, you have little to no access to traditional loans, credit cards, and similar ways of building credit independently. Luckily, you can still build a credit profile with a bit of help. Follow these steps to kick-start your credit profile the right way:
- Understand credit scoring basics
- Explore financial products available to you
- Practice good credit behavior
- Monitor your score
How Credit Building Works
Before you start building a credit profile, you should know which score to aim for and how it’s calculated. The following table breaks down FICO scoring which is the most popular credit score model:
Credit reporting is only done for legal adults, so you’ll most likely get your first score when you turn 18. The only exception is being an authorized user of your parent’s credit card, which we’ll explain later in this guide.
According to Experian’s report, the average score of young adults ages 18 to 25 (those who have one) is 679. However, according to the Consumer Financial Protection Bureau, over 80% of 18- and 19-year-olds and more than a third of 20- to 24-year-olds have no score at all. To build strong credit you need to understand the main factors influencing it:
- Payment history—The most important determinant of your score as it demonstrates your responsibility toward repayments
- Credit utilization—The ratio between the credit limit and credit used showing how well you’re managing borrowed funds
- Credit history length—The longer your credit history, the higher your score (that is unless you damage it through irresponsible patterns of missed or late payments). That’s why starting early is a great way to increase your score later in life
- Credit mix—This shows the diversity of your credit portfolio. If you have multiple accounts and manage all without issues, it’s a good sign you’re a responsible borrower
- New credit—The credit bureau registers all new credit accounts and hard inquiries, which should be kept to a minimum
Which Financial Products Are Available to Teens?
Source: Emil Kalibradov
The CARD Act of 2009 made it exceptionally hard for anyone under 21 to obtain a credit card by requiring them to demonstrate an independent ability to make repayments. You might get one if you’re over 18, but you’ll need to show you can make repayments without anyone’s help, which means having a stable job or any independent source of income, or you’ll need a parent to cosign on your account.
If you’re over 18, you might be able to take out a secured credit card as an alternative. Unlike regular credit cards, secured options require a deposit that also serves as your credit limit. The bank will report your credit activity, which may help you to eventually obtain an unsecured credit card.
Student loans are another option, but you should only take them out if necessary. Using them solely for credit building might not be a good idea because there are cheaper and faster solutions. If you still decide to go down this road, a federal student loan is your best option because it typically doesn’t require a credit history.
If you’re a minor, credit building is more complicated because your options are limited, so you’ll likely need a parent’s help. This topic deserves special attention, so it’s covered later in this guide.
Building Healthy Credit Behavior
Credit building involves continuous effort and careful financial organization. Taking out a loan or a credit card is only the first step, and the real challenge lies in proper credit management. Any defaults or issues can stay on your file for up to seven years, damaging your score.
The good news is that you can secure and maintain a high credit score by following the right practices:
|Prioritize Repayments||Making a credit payment is the first thing you should do after receiving a paycheck or any income. Don’t postpone it in favor of other expenses, as missed or late repayments can do long-term damage to your credit profile. You have 29 days from the due date before the credit bureau records a late payment|
|Control Your Credit Utilization||Your credit utilization rate shouldn’t exceed 30% and ideally should be below 10%. Only use credit funds when you don’t have other options, and don’t splurge on unnecessary purchases|
|Solidify Your Credit Mix||While having different types of credit can improve your score, opening too many accounts can hurt it. The golden rule is to only make hard inquiries when you have a specific need for external funds. Shopping for rates and asking about general credit terms is fine, but don’t submit credit applications unless necessary|
How To Keep Track of Your Credit Score (And Why You Should Do It)
When you start building credit, you should monitor your credit score and credit report to ensure you’re on the right track. You can contact a bank to request a report or reach out to the three major credit bureaus directly:
Online third-party services can sometimes be a good alternative, but you must beware of unlicensed providers. Check the platform’s credibility and connection to the bureaus before proceeding.
Checking your report even if you haven’t started building credit can be a good idea as it’s a good way to spot signs of identity theft. According to Javelin’s research, child identity fraud robs U.S. families of almost $1 billion annually and affects one in 50 children.
Minors are particularly vulnerable targets because their Social Security numbers (SSNs) aren’t closely monitored, so fraudsters can use them to forge fake identities. This is known as synthetic identity fraud, and it can be quite difficult to detect, as explained in the below excerpt from a Federal Reserve whitepaper:
“It is often difficult to differentiate synthetic identity payments fraud from traditional identity payments fraud and legitimate financial activities. As a result, subject matter experts indicate that the number and volume of synthetic identities in financial portfolios are underestimated.
For example, ID Analytics estimates that 85 percent to 95 percent of applicants who were identified as synthetic identities were not flagged as high risk by traditional fraud models, such as those used to detect traditional identity theft.”
Victims are typically unaware of someone using their personal information until they notice a credit item on their report that shouldn’t exist. Preventing and/or resolving identity fraud is a serious endeavor that you typically can’t do independently. That’s why a parent’s help might be necessary.
How Parents Can Help Children Build Credit and Keep Their Identities Safe
Many children—especially minors—can’t start building credit independently. To give their children a head start in life, parents often take these matters into their own hands, at least in the beginning.
If you’re a parent looking to help their child build a strong credit profile, you may use a common method—adding them as an authorized user of your credit card. By doing so, you can help your child start their credit history and build a foundation for a strong credit profile—at least in theory.
Despite its popularity, this approach comes with many caveats:
- Your bank must support credit reporting for authorized users
- Your child can legally use your credit card and may damage your credit
- Your child will inherit your credit profile, so a poor credit history will damage their own
- If you remove the child from your card, all credit activity is removed from their record. Instead of building their own credit history, they leverage yours and have to start over once removed from the account
The above issues make authorizing your child a subpar credit-building option. It also does nothing to safeguard their identity, which requires tools and resources typically unavailable to an average family.
If you want to build your child’s credit and monitor their profile to reduce the risk of identity fraud, FreeKick can help.
FreeKick—Effortless Credit Building
To get started with this product—created by Austin Bank, an FDIC-insured bank located in Austin, Texas—open an account through the following steps:
- Make a Deposit—Choose a plan based on the one-time FDIC-insured deposit you make:
- Free—Make a $2,500 deposit
- $49/year—Make a $1,750 deposit
- $99/year—Make a $1,000 deposit
- Set It and Forget It—Once you pick a plan, your child will automatically build credit for the next 12 months
- Keep Growing—Renew the account after 12 months and keep building your child’s financial future, or cancel the account and receive 100% of your deposit back
FreeKick will take it from there and help your child:
- Build a credit history
- Safeguard their credit profile
How FreeKick Helps Jump-Start Teens’ Credit Profiles
When you sign up, FreeKick will help your child build 12 months of credit history to give them a foundation for a strong credit profile.
If your child is a legal adult (18 in most states), FreeKick will immediately start reporting their credit activity to the three consumer bureaus to help them establish a credit profile. Your child can build a credit history while they’re a minor, but reporting will be activated when they come of age because credit bureaus only accept reporting for adults.
After the 12-month period ends, you can renew the subscription to help your child build another 12 months of credit history. Each cycle boosts your child’s profile, giving them a major advantage later in life—good credit can save your child over $200,000 throughout adulthood.
You can cancel the account at any time, and your funds will be transferred back to the account they came from. Note that if the account is closed before your child becomes an adult, no credit can ever be reported for the account as the credit bureaus do not accept credit reporting for minors.
Credit Profile Monitoring and Protection for Minors and Young Adults
Besides keeping close track of your child’s credit, FreeKick monitors their credit profile to detect signs of fraudulent activity. Minor identity fraud is a rising concern that has already done serious damage to families across the U.S., so you can leverage FreeKick’s monitoring services to keep your child safe.
To lower the risk of credit fraud and help your child establish a strong credit profile, sign up for FreeKick.
Featured image source: Andrea Piacquadio