How to build credit as a teen

Credit is an amazing word. It gets used for all sorts of things, like crediting a source in a research paper or giving your brother credit for not stealing all your Cheetos even though they were RIGHT THERE waiting to be stolen.

In the money world, credit is a big deal. Without credit cards, online shopping would be much harder, and without lines of credit like mortgages and car loans, a whole lot of people wouldn’t be able to afford houses or cars.

The word credit actually comes from a Latin word meaning belief or trust, which makes sense because when someone loans you money, he or she is trusting that you will pay it back. Credit scores were invented to represent how likely it is that you’ll do that.

Trouble is, credit scores are based on a lot of factors, all of which reflect your history using credit. Without a credit score, you won’t get money from most lenders. So, how do you get credit if you don’t already have it?

How do I get credit?

Creating a credit profile can seem like a Catch-22 because many credit-building sources require a credit score!

I remember thinking that this was confusing and unfair when I was first looking to build credit, too. Luckily, there are a couple of side doors into the world of credit that can help get you started at any age.

If you’re a minor…

If you’re under 18 in the US, you cannot qualify to borrow money or open a credit card of your own. However, there are still ways to start building a healthy credit record with the help of your parents or legal guardians.

Become a registered user on an adult’s card.

Registered users get access to the perks of the credit card, but are not responsible for paying for charges made on the card. Living the dream.

Of course, this option requires a lot of trust on the part of the person allowing you onto his or her account, so if you want to remain on good terms with this person, don’t go hog-wild with the credit card.

My dad did this for me when I was first starting out, and it was understood that the card was for emergency use only. Otherwise, I used my debit card. I’m so thankful now that I got the benefit of his years of credit background and good money management. It made getting my first apartment much easier. Thanks, Dad! 🙂

If you’re 18 and over…

Becoming a registered user is also an option for non-minors, but once you’re legally an adult, a lot of other options open up, too.

Have an adult co-sign on your first loan or credit card.

Co-signers are basically there to reassure the credit-givers that SOMEONE will pay them back, even if you flake out. This means they are on the hook for any money you borrow or charge if you don’t pay it back, so, again, don’t abuse this privilege if you want to keep your relationship with your co-signer healthy.

Get a secured credit card.

This one you can do all on your own! Secured credit cards are designed to help people build enough credit to get a real, big-person card.

To get a secured card, you’ll usually have to pay a deposit equal to what the card’s credit limit is. It then works just like a real card, including interest rates on unpaid balances. When you are ready to graduate to an unsecured card, pay off any balance on the unsecured card and you’ll get your deposit back.

If you’re interested, WalletHub has a nice list of 10+ Best Secured Credit Cards for 2017.

Report your rent payments.

If you’re living off-campus at college or just living on your own, using a service that reports your rent payments to the credit bureaus can help you build credit without needing a credit card or loan. You’re going to be paying rent anyway, so why not benefit from it?

These services typically charge you a fee for each payment they report or each month you use them, and some charge a set-up fee. However, in the long run, a higher credit score could save you much more money in the future, so a rent payment reporting service might be worth it if you can afford it.

You might need to get your landlord or apartment office on board, and not all rent-reporting services report to all three credit bureaus, so make sure you read all the fine print before shelling out any money.

Popular services include RentReporters, Rent Kharma, Rent Track, PayYourRent, and ClearNow. I have not personally used any of these services, so I can’t endorse any one of them over any other.

Take out a credit-builder loan.

Some banks and credit unions will loan small amounts of money to people with bad or no credit with the goal of building those people’s credit score.

There’s a catch, though.

When you get one of these loans, you don’t actually get the money. The bank puts it into an account, where it waits for you to complete the payments on it. THEN you get the money.

This is clearly not a loan for people who actually need the money for something right away. It really is only for building a payment history. However, the amounts are small, sometimes only $100, and the potential bumps to your credit are large, so if you are 100% sure you can pay all the installments, this could be a nice way to add some points to your score.

Be careful

Don’t over-extend yourself trying to do all of these things in a hurry. Pick one or two ways you want to start building credit, and put those into action. If, after a few months, you’re still on track and want to explore other options, feel free.

Remember that no matter what methods of credit creation you use, the best thing you can do to boost your score is to make payments on time. Do that consistently, and your score will rise naturally.

What is a credit score?

You might have seen the commercials for sites and credit cards that give people access to their credit scores. All the people in those ads seem so surprised and excited to get their credit score, and it always shows a screen with some number in the 700s on it. But, you might be thinking, what exactly is a credit score?

What are credit scores?

Essentially, credit scores are meant to represent how likely you are to pay what you owe.

Credit scores are based on a formula created by a company called the Fair Isaac Corporation (FICO), so you’ll often hear credit scores called “FICO scores“. There are other types of scores out there, but for our purposes, we’re going to focus on the classic FICO score, as that’s what people are usually talking about when they say “credit score”.

There are three credit bureaus — Experian, Equifax, and TransUnion — that collect credit reports on people and provide credit scores based on what’s on these reports. Scores will often vary a little between these companies depending on what information they have collected in their reports.When a credit card or bank offers you free access to your credit score, it will use data from one or more of these credit bureaus to come up with the score.

Who cares?

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Zendaya may not, but some people do

Money lenders: Banks and other lenders use credit scores to determine if you are someone they want to loan money to for stuff like a car or mortgage. Usually, people with high credit scores will be approved for bigger loans and be charged lower interest rates than those with lower credit scores.

Landlords: Credit scores help landlords decide if you’ll be a good bet as a tenant. A high credit score shows landlords you are responsible and will probably pay your rent on time, so if you’re competing with other applicants for a nice apartment, a good credit score can help put the odds in your favor.

Credit card companies: People with good credit will be approved for a wider range of cards and higher credit limits than those with poor credit.

Employers: Sometimes, employers look at credit scores to get a picture of who they might be hiring, although this practice has been widely criticized.

What do the numbers mean?

Credit scores range from 300 to 850. The higher your score, the better you look to lenders and landlords.  Scores generally break down like so:

Anything 750+ is Excellent

Between 700 and 749 is Good

Between 650 and 699 is Fair

Between 600 and 649 is Poor

Anything below 600 is Bad

How do people get good credit scores?

Credit scores depend on several criteria, some of which are more important than others.

fico-score-percentages

Source: FICO.com

Payment History: Your payment history is the most important factor that controls your credit score, and the concept is so simple. It reflects whether you pay your bills on time or not. Late payments or debt that “goes into collections” (basically someone has to chase you down for it) cause terrible damage to your score. Pay your bills, people.

Amount of Debt: This category is also known as “Credit Utilization Ratio”. Essentially, the more you owe compared to what credit you have available, the worse your score. More on that in another post.

Length of Credit History: For teens and young adults, this section is tough. The longer you’ve been building credit, the better, but most of you haven’t had a chance to do much credit-building. That makes the other parts of the score even more important when you’re starting out.

New Credit: Every time you apply for a new loan or credit card, the company you are applying to does a “hard pull” of your credit report to check you out, and your score gets dinged a little. “Soft pulls”, like when you request your own report, don’t affect your score.

Credit Mix: Credit bureaus like to see that you’ve had experience with a mix of credit situations, such as credit cards, mortgages, loans, etc. The more types of credit you’ve successfully managed, the better your score looks.

Wrap-up

So there you have it. The credit score system may not be perfect, but it’s not going away any time soon.

Your personal credit score plays an important part in your financial future, so it’s a good idea to at least be aware of it in your teen years and going into college. Debt and late payments when you’re wild and reckless can set you up to spend years re-building your credit. You’ll have plenty to worry about when you get out of college. Whether you’ll end up in a crappy apartment because your credit score is in the toilet shouldn’t be one of them.

What is a credit card?

Credit cards are both amazing and terrifying.

They allow us to pay for whatever we need instantly and without carrying cash around, and they take up only a tiny space in our wallets. A good credit card can be a powerful tool, but it can also be dangerous. Let’s take a look at what credit cards are and how they work.

Spending:

When you use a credit card to buy something, like those shoes you really, really want, you’re actually borrowing that money from the bank or credit card company. The company pays the store or vendor and you walk away with some shiny new kicks…and in debt.

Because you just borrowed money from the bank or credit card company, you now owe it that money. If you’re smart, you’ll pay back all of that money at the end of the month because then you don’t need to pay anything more than the price of the shoes.

However, if you don’t pay all the money back, you’ll be charged interest on it. This is something you want to avoid like the plague. Credit card interest is some of the highest interest out there. It’s not unusual to see 15% or more. Actually calculating this interest is complicated, but NerdWallet has a great article breaking down how credit card interest is calculated.

Limits:

Most credit cards have limits of how much you can borrow on them at one time. For teens and young adults, this number is usually in the low thousands. This number usually increases as time goes by and you handle the card responsibly. Of course, just because you have the ability to charge thousands of dollars doesn’t mean you should!

Ideally, you will never charge more than you can pay off at the end of the month. Otherwise, anything you don’t pay off will roll over to the next month and become credit card debt. (Boo, hiss!)

PIN:

In the United States, credit cards don’t require PINs. In many other countries, however, PINs, along with chips embedded in the card, are required to make purchases with credit cards. The chips are being adopted in the US, but are still paired with a signature rather than a PIN.

Security:

If your credit card is lost or stolen, you can contact your bank to stop further charges on it. Most credit card companies are very good about refunding fraudulent charges on your card and quickly sending you a new card. The biggest hassle involved with a stolen or lost card is having to change all online accounts that use that card. For the added security, however, all your online shopping/accounts should be attached to credit cards, rather than debit cards.

Credit History:

Credit card payments form the bulk of most people’s credit history when they are young. Before you have responsibilities like car payments and mortgages, credit cards and student loans are the best ways to prove how trustworthy you are with money and start building a credit score.

Responsible managing of a credit card or two over the long term is a great way to start building a good credit history. However, you have to be 18 to have a credit card in your name. If you’re too young to have your own card, there are other steps you can take to make a start building credit, which we’ll discuss in another post.

Fees:

Some credit cards charge a yearly fee to keep them. These ones often have great perks, but not always. Your first card should probably be a simple, no-fee card.

Perks:

The perks you can get from credit cards vary dramatically from card to card, but the most common ones are cash back and airline miles or points. Cash back simply gives you back a certain percent of your purchases on the card. Airline miles or points build up when you buy stuff on the card, and then you can use them to book airline travel for cheap or even for free.

When should you use a credit card?

Almost anything can be purchased using a credit card, which is why they can be so dangerous. It’s so easy to swipe that plastic and forget that the money isn’t free. However, with responsible use, credit cards are so much better than debit in many ways.

The perks, the security, and the credit-building power of credit cards makes them preferable to debit cards, but ONLY if you can trust yourself to not go on spending sprees. Of course, do your homework on any card you think you might want to decide which ones fit your needs and habits.