Building credit as a teenager can give you a head start in life. Believe it or not, actions that you take as a teen can have lasting effects on your ability to get loans, mortgages, credit cards, and even some jobs as an adult. A good credit score can open many doors, helping you qualify for lower interest rates, better rewards, and more financial flexibility, while a bad one can limit options and cause increased interest rates and fees for young borrowers. Additionally, having good credit can help you avoid common pitfalls that many young adults face, such as debt, identity theft, and fraud. By starting early, you can establish a solid credit history that will serve you well for years to come.
In this blog post, we will cover the following topics:
- How is a credit score calculated?
- 7 Ways to build credit as a teen
- What’s a good credit score to aim for?
- What can hurt your credit score
- How to repair a poor credit score
How is a credit score calculated?
Your credit score is calculated based on five main factors:
- Payment history: This is the most important factor, accounting for 35% of your score. It shows whether you pay your bills on time and in full. Late or missed payments can lower your score significantly.
- Credit utilization: This is the second most important factor, accounting for 30% of your score. It shows how much of your available credit you are using. The lower your credit utilization, the better. A good rule of thumb is to keep it below 30%.
- Length of credit history: This accounts for 15% of your score. It shows how long you have been using credit. The longer your credit history, the better. It shows that you have experience and consistency in managing your credit.
- Credit mix: This factor accounts for 10% of your score. It shows the diversity of your credit accounts. Having a mix of different types of credit, such as credit cards, loans, and mortgages, can boost your score. It shows that you can handle different kinds of credit responsibly.
- New credit: This factor accounts for 10% of your score. It shows how often you apply for new credit. Applying for too many new accounts in a short period of time can lower your score, as it indicates that you are in need of credit and may be a risky borrower.
7 Ways to Build Credit as a Teen
As a teen, you may not have access to many credit products, but there are still some ways you can start building your credit. Here are some tips to help you get started:
Become an Authorized User on a Credit Card
One of the easiest ways to build credit as a teen is to become an authorized user on someone else’s credit card, whether a parent, guardian, relative, or other trusted individual. This means that you can use the card under someone else’s account, but you are not legally responsible for the payments. The cardholder can set a limit on how much you can spend and monitor your activity. As an authorized user, you can benefit from the cardholder’s credit history and payment behavior, as long as they are responsible with paying on time. This can help you establish a credit history and boost your score. However, if the cardholder has a poor credit history or misses payments, it can also hurt your score. So, go into an agreement like this carefully with the cardholder—make sure you are on the same page and trust each other.
Open a Joint Credit Card or Loan with a Parent or Guardian
Another option is to open a joint credit card or loan with a parent or guardian. This means that you and the adult share the responsibility and liability for the account. You can both use the credit product and make payments. This can help you build credit as a teen, as long as the payments are made timely and in full. However, if one of you defaults or misses payments, it can damage both of your credit scores. So, as with all financial agreements, make sure you and your parent or guardian communicate well and agree on how you will use and repay the credit product.
Get a Student Credit Card
If you are at least 18 years old and enrolled in college, you may be eligible for a student credit card. A student credit card is designed for college students who have little or no credit history. It usually has a low credit limit, a high interest rate, and some perks, such as rewards, cash back, or discounts. A student credit card can help you build credit as a teen, as long as you use it wisely and pay it off every month. However, if you overspend, carry a balance, or miss payments, it can hurt your credit score and lead to debt. So make sure you only charge what you can afford and pay your bill in full and on time.
Use a Secured Credit Card
Not eligible for a student credit card? Try a secured credit card. A secured credit card is a type of credit card that requires a security deposit, which acts as your credit limit. For example, if you deposit $500, you can charge up to $500 on the card. A secured credit card can help you build credit as a teen, as long as you make timely and full payments. Your payment activity will be reported to the credit bureaus, which will improve your credit score over time. However, if you miss payments, your deposit may be used to cover the balance, and your credit score will suffer. So, make sure you pay your bill in full and on time, and avoid using more than 30% of your credit limit.
Make Payments on a Student Loan
If you have taken out a student loan to pay for your education, you can use it to build credit as a teen. A student loan is a type of installment loan that you repay over a fixed period of time, usually with interest. A student loan can help you build credit as a teen, as long as you make timely and full payments. Your payment activity will be reported to the credit bureaus, which will boost your credit score over time. However, if you miss payments on your loan, your credit score will drop. So, make sure you keep up with your loan payments, and take advantage of any repayment options or assistance programs that are available to you.
Maintain Good Financial Habits
While these rules of thumb may not directly increase your credit score, good habits can help you avoid pitfalls that can damage your credit score. One of the best ways to protect your credit (now and in the future!) is to build and maintain good financial habits. This means that you should:
- Track your income and expenses by creating a realistic budget that you can stick to
- Save some money every month and build an emergency fund that can cover at least three to six months of living expenses
- Avoid unnecessary debt: only borrow what you need and can afford to repay
- Check your credit reports regularly (see more below) and dispute any errors or fraud that you find
- Protect your personal and financial information to avoid identity theft and scams
Monitor Credit Reports
Another important step to build credit as a teen is to monitor your credit reports. While simply checking your score doesn’t raise it, it will help you understand the specific things you can work on to improve your score the most. Your credit reports are records of your credit activity and history, and they are maintained by the three major credit bureaus: Equifax, Experian, and TransUnion. You can get a free copy of your credit report from each of the three bureaus once a year through www.annualcreditreport.com. You can also get free credit reports from some online services, such as Credit Karma, Credit Sesame, or NerdWallet. You should review your credit reports regularly to look for any errors, inconsistencies, or signs of fraud. If you find any, you should dispute them with the credit bureau and the creditor so you can get them corrected as soon as possible.
What’s a Good Credit Score to Aim for?
Your credit score is a three-digit number that ranges from 300 to 850, depending on the scoring model used. The most common scoring model is the FICO score, which is used by 90% of lenders. The FICO score has five categories:
- Very poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800-850
As a teen, you may not have a credit score yet, or you may have a low one, due to your limited credit history and experience. However, you can aim to improve your credit score over time by following the tips we discussed earlier. A good credit score to aim for is at least 670, which is considered “good” by most lenders. Anything higher than that can help you qualify for better terms and rates, which can help save you money in the long run. Keep in mind that your credit score will continue to change over time depending on your credit activity and behavior, so you should monitor your credit score regularly and strive to maintain or improve it.
What Can Hurt Your Credit Score?
While there are many ways to build credit as a teen, there are also some things that can hurt your credit score. Here are some of the most common ones:
- Missing or making late payments: This is the worst thing you can do for your credit score, as it shows that you are not trustworthy or reliable with your credit obligations. Missing or making late payments can lower your score by up to 100 points and stay on your credit report for up to seven years.
- Using too much of your available credit: This is another major factor that affects your credit score, as it shows that you are relying too much on credit and may have trouble repaying your debts. Using too much of your available credit can lower your score by up to 45 points, and it will stay on your credit report until you pay off your balances.
- Applying for too many new accounts: This is a minor factor that affects your credit score, as it shows that you are in need of credit and may be a risky borrower. Applying for too many new accounts can lower your score by up to 10 points and stay on your credit report for up to two years.
- Closing old accounts: This is another minor factor that affects your credit score, as it reduces your credit history and credit mix. Closing old accounts can lower your score by up to 15 points and stay on your credit report for up to 10 years.
- Having negative items on your credit report: This includes things like collections, bankruptcies, foreclosures, repossessions, judgments, and tax liens. These are serious events that show that you have failed to meet your credit obligations and can severely damage your credit score and history. They can lower your score by up to 200 points and stay on your credit report for up to 10 years.
How to Repair a Poor Credit Score
If you have a poor credit score, don’t despair. You can repair your credit score over time by taking some steps to improve your credit habits and behavior. Here are some tips to help you repair your credit score:
- Pay your bills on time and in full: This is the most important thing you can do to repair your credit score, as it shows that you are committed and responsible with your credit obligations. Paying your bills on time and in full can raise your score by up to 100 points and improve your credit report over time.
- Pay down your balances: This is another important thing you can do to repair your credit score, as it shows that you are reducing your debt and improving your credit utilization. Paying down your balances can raise your score by up to 45 points and improve your credit report over time.
- Keep your old accounts open: This is a simple thing you can do to repair your credit score, as it shows that you have a long and diverse credit history. Keeping your old accounts open can raise your score by up to 15 points and improve your credit report over time. Even if you barely use an account, sometimes it can be more helpful to keep the account open instead of closing it.
- Limit your credit inquiries: This is a smart thing you can do to repair your credit score, as it shows that you are not desperate for credit and may be a stable borrower. Limiting your credit inquiries can raise your score by up to 10 points and improve your credit report over time, so think twice before taking any actions that require a credit check!
- Dispute any errors or fraud on your credit report: This is a necessary thing you can do to repair your credit score, as it shows that you are vigilant and accurate with your credit information. Disputing any errors or fraud on your credit report can raise your score by up to 25 points and improve your credit report over time.
- Seek professional help: This is an optional thing you can do to repair your credit score, as it shows that you are serious and proactive about your credit situation. You can seek help from a reputable credit counseling agency, a credit repair company, or a financial planner, depending on your needs and goals.
Build Good Habits with EVERFI’s Financial Literacy Courses
Building credit as a teen can be challenging but rewarding. By following the tips and advice in this blog post, you can start building your credit score and history, and set yourself up for financial success in the future.
As a teacher, you can also help your students learn about credit and how to build it, by sharing this blog post with them, sharing an EVERFI lesson, or by creating your own lesson plans and activities. By doing so, you can position yourself as a hero, providing a critical life skill that your students need to be successful.
The free resources available from EVERFI to help teach credit education include:
- Build: Credit Fundamentals – a digital program that helps high school students build knowledge about acquiring credit, growing credit, managing credit and dealing with fraud or inaccuracies with credit in effective ways. Students will learn to make wise decisions that support their current and future financial well-being, with an emphasis on building and maintaining good credit strategies.
- EVERFI: Financial Literacy for High School – this financial education 101 course teaches high school students how to make wise financial decisions to promote financial well-being over the course of their lifetime. One of the lessons in the course is on managing credit and debt, where students develop an understanding of credit, how a credit score is calculated, and the impact of that score on the features and fees associated with credit cards.
- FutureSmart: Financial Literacy for Middle School – this course empowers students to effectively manage their finances, make sound decisions, and become financially responsible. In lesson 3 of the course (Ways to Pay), students learn the importance of saving and how to manage day-to-day expenses. They also help a character find a job, review his paycheck and credit card statement, and decide when to utilize different payment types.
Check out all of the free resources EVERFI has to offer for K-12 students, spanning topics including financial education, mental health awareness, prescription drug safety and vaping prevention, character education, stem/career readiness, and more.
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Kevin Mechenbier is a functional subject matter expert for EVERFI, based in Colorado. At EVERFI, he supports educators across the US and Canada as they implement EVERFI’s no-cost resources related to Financial Education and Career Readiness. With a background in education nonprofits, Kevin is a passionate supporter of real-world learning as a way to bridge gaps as students enter their career.