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Credit for Teens

Credit can be…confusing. But it doesn’t have to be! Here are the basics to start learning about this important financial tool.

teenage-boy-figuring-out-credit-score

Credit is generally a misunderstood concept because money is a topic that most families are uncomfortable discussing. Previous generations were told to keep their financial situation quiet, so we learned what we could from the mistakes of others or learned the hard way by making our own mistakes. 

As a teen, learn early on everything you can about how to successfully manage credit and use it to your advantage. This takes discipline and understanding the risks associated with too much credit usage or poor management but builds lifelong habits that lead to success.

Let’s discuss why credit is important for teens to know about!

Why Building Credit is Important

The modern economy runs on credit, and good creditworthiness can be critical to a good financial life. Having excellent credit will allow you to borrow money at a lower interest rate, saving money over the long term, because having bad credit has the opposite effect. Bad credit can mean being denied a mortgage, credit card, or student loan or cause you to have to pay much more in interest.

Your credit score is used for background checks to secure a rental, jobs requiring clearance or handling money, or insurance policies. So, even if you aren’t in the market for a mortgage or loan right now, it’s beneficial to have excellent credit to use in daily life.

Financial security is important for mental health and building positive relationships with others. Borrowing money from loved ones because you cannot pay creditors or having to work overtime to cover essential bills can put a strain on your life that isn’t necessary. Many long-term relationships suffer under financial pressure due to a lack of financial discipline and skills that you are working on right now.

How to Build Credit As a Teen

Build Consistent Income Using a Job or Side Hustle

The first step is to get a job or side hustle where you have a fairly consistent income to make payments on credit lines and show stability. Choosing a part-time job doesn’t have to be hard, but you could consider choosing a job in an industry that you are interested in working in as an adult. Jobs don’t help us build credit but is a key factor in being able to qualify for credit

When I was a teen, I chose to work with a youth business initiative to teach teens how to start their own businesses. This side hustle allowed me to learn about personal and business credit, budgeting, sales, marketing, and basic personal finance management that allowed me to feed my younger siblings when our parents didn’t have the money to do so. Now, I own three successful businesses and am passionate about teaching the next generation how to set out on that path if they choose to.

Build a Relationship with a Bank

Next, open your own checking and savings accounts. Get a debit card for the checking account and have your paychecks deposited automatically into the checking account. Consider paying yourself first from your paycheck and moving a percentage into savings automatically to build that investment building habit early. Having a bank account builds a relationship with that bank, so when you are ready to apply for credit, they know who you are and how you manage your money.

Ways of Building Credit

Depending on the laws in your state, you might be able to put a household utility bill in your name depending on your age which will help build up your credit score. Even if your parents contribute towards the bill, you are responsible for paying bills on time. 

If your parents have good credit and are paying their credit lines on time, it might be beneficial to ask to be added to their accounts as an authorized user. Remember to be conscious of what you are spending and give your parents money towards what you have charged to their credit account. 

If being added as an authorized user on your parents’ account is not an option, apply for a prepaid credit card that is attached to your bank account or requires a cash deposit upfront upon approval. Most credit cards have a minimum age of 18 to be allowed to apply for an account. These cards are easier to qualify for new credit holders with little or no credit history because collateral is put up against the credit amount. However, keep in mind that interest charges can be higher on credit cards for borrowers with little credit history because you technically pose more risk to the company because they don’t know if you will pay back what you borrow yet. 

Just a Word of Caution…

It’s best to avoid running up charges that you don’t have the money to immediately pay off or educate yourself on the interest rate so you have enough money to cover it when the bill comes due. Making on-time payments as a teen builds your confidence in yourself, encourages positive financial habits, and establishes a long credit history that you can use as a young adult.

How Your Parents Can Help You Build Credit As a Teen

Parents can help you read through the fine print of credit offers before you accept them. Some credit companies offer introductory rates for the first 6-12 months. Then the rate hikes quickly, with a large sum due for interest dating back to the start of the credit line if the total amount hasn’t been paid off by the time the intro rate expires. Educating yourself on the fine print can help avoid this costly mistake.

Ask your parents how to write out a budget and tips on keeping credit usage low. Money and credit management are hugely important for your future success, and developing positive habits early on is important for future success. Parents can help you understand the consequences of not making payments on time or in full every month. 

Talk to your parents before making big purchases on credit cards and ask for advice. Having money saved to pay the bill in full can help avoid paying for interest charges or allowing the credit limit to be reached. Ask about how they managed their credit usage and what mistakes they have made in the past that you can learn from.

Credit Definitions

  • Credit: A contract between a borrower and lender that money will be loaned for a specified amount of time and then paid back with interest.
  • Credit score: A three-digit number associated with a person that gives lenders a picture of the potential borrower’s ability to repay extended lines of credit based on past history.
  • Credit report: A complete picture of a person’s ability to repay their credit based on how much is currently owed, payment history, length of credit history, and credit limits.
  • Credit usage: This shows the amount of credit used compared to how much has been extended by a lender.
  • Authorized user: A person that has been allowed to use the account but doesn’t have a legal responsibility to pay the bill.
  • Prepaid credit card: This card limit is based on the amount of the money put up as collateral; when the balance is used, the card is turned off until the next deposit.
  • Interest rate: Amount of money charged to a borrower by a lender as a percentage of money loaned paid out on top of the principal of the loan.
  • Introductory rate: A lower rate offered by a lender as an incentive to get new applicants to apply for the card or loan.
  • Interest: A fee paid to a lender by a borrower in exchange for money lent.
  • Budget: A financial plan for a certain period of time.

Books and Other Resources to Learn About Credit

Here are some of our favorite books to learn about credit. Check out our teen money book library for more great reads!

Credit-Lit Credit 101 for Teens. This book was written by a board-certified credit consultant and explains credit to teens in a way that is easily understood. Learn about the positives and negatives of credit and usage in a way that is relatable. Personal finance isn’t taught in schools so teens and parents are looking to experts for the information they need.

Smart Spending: The Teens’ Guide to Cash, Credit, and Life’s Costs (Financial Literacy for Teens). Teens learn about the true cost of living and expenses associated with being an adult in a way that is sure to help you learn to cover all needs and some wants by stretching income and credit to align with your values.

The Money Club: A Teenage Guide to Financial Literacy. Written by a young, passionate teacher that understands firsthand the impact that teachers have on their students’ lives. She offers practical advice and open conversations on life critical topics like credit cards, bank accounts, budgeting, student loans, and developing healthy money habits for a great relationship with money long term.

Rich Dad Poor Dad for Teens: The Secrets about Money–That You Don’t Learn in School! Robert Kiyosaki is a well-known finance author that teaches readers how to stop working for money and instead make your money work for you. Expect straight talk from this author and personal life stories that are easy to relate to. Learn by doing with action steps and thoughtful scenarios that provoke free thinking about money.

Financial Literacy Boot Camp for Teens and Young Adults: Six Steps to Living a Life of Financial Freedom. Learn how to make effective, informed decisions that you can carry with you throughout your life. Create a life plan for your finances, establish a great credit history, save and invest with purpose, and have enough insurance to cover whatever life throws at you by following this guide.

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About the Author

Jessica Anglin

Jessica was raised in a household where her parents didn't know how to pay bills on time and indulged in life's pleasures on a consistent basis in order to cover the misery from working jobs they hated for money that wasn't enough to live off of. She took on the role of caregiver to 4 siblings at age 15 and started her first business selling tie-dye t-shirts in order to buy food and provide a stable home. Nineteen years later, she owns three successful businesses, has earned an MBA in Finance, and works daily to set an example for the next generation on how to build wealth so they never face the same struggles.

Last updated on: April 9, 2022