Everything Teens Should Know About Building Credit
Last updated August 17, 2023
Being aware of what a credit score is and how it works is an important part of becoming financially literate. Having a good credit score can make it easier to do things like rent an apartment, take out loans to pay for big expenses, apply for credit cards, and in some cases, secure a job. We know the concept of credit scores and credit cards can be tricky to understand - which is why we’re here to help! Here are important things you should know about building credit - what a credit score is, how to start building credit, and how to achieve a high credit score!
Before making any big financial decisions, we strongly advise you to talk to a parent/guardian or a trusted adult. They can help you make informed choices about building credit and taking on debt that can ensure your financial stability and success in the future.
What is a credit score?
A credit score is a three-digit number, typically on a scale of 300 to 850, that estimates how likely you are to repay borrowed money (credit cards, department store cards, car payments, etc). In the US, there are three major credit bureaus: Equifax, Transunion, and Experian. Each bureau has its own equation for determining your credit score.
What are the credit score ranges?
Credit scores range of 300 to 850. While they vary slightly by institution, below are the general credit score ranges:
- Excellent credit: 800-850
- Very good credit: 740-799
- Good credit: 670-739
- Fair credit: 580-669
- Poor credit: 300-579
What factors determine your credit score?
There are 5 components that determine your credit score:
- Payment history (35% of your credit score). Your payment history is a record of your on-time and late payments from past loans and credit cards. Payment history makes up the largest percentage of your score. Late payments lower your score, so always be sure to pay your bills early or on time and never skip or miss a payment.
- Amounts owed: (30% of your credit score). Also known as your debt to credit ratio, this number shows how much debt you owe and how much of your available credit on a credit card you’ve used. A good rule of thumb is to spend no more than 30% of your available credit. For example, if you have a credit card with a total available amount of $500, you don’t want to have a balance of more than 30% or $150.
- Length of credit history (15% of credit score). The length of your credit history matters. Your credit score is impacted by how long your credit accounts have been open, the age of your oldest account, the age of your newest account, and the average age of all your accounts combined.
- How many types of credit are in use (10% of your credit score). Having a variety of credit types will help boost your credit score. This includes auto loans, student loans, credit cards, and other lines of credit.
- Account inquiries (10% of your credit score). Whenever you apply for credit (credit cards, department store cards, car loans, etc.), lenders will review your credit score. Each time they do, the credit bureaus keep track. Having too many credit account inquiries can lower your score.
Why do credit scores matter?
Your credit score is important because it affects your eligibility for loans, credit cards and other financial resources. It also has an impact on:
- Interest rates. If your credit score is low, you may have much higher interest rates on things like credit cards, car payments, and other loans, compared to a person with a high credit score.
- Renting an apartment. Landlords have the right to turn down your apartment application based on your credit score.
- Paying for utilities. A low credit score means you may have to pay a higher down payment or deposit for utilities like electricity.
- Job prospects. In some states, employers have the right to deny you employment based on your credit history.
Where can I find my credit score?
If you never had any credit cards, joint bank accounts, rental agreements, utility bills, or loans in your name, you probably do not have a credit score (yet) - which means there’s no way to check it. For those who do have a credit history, you can pull your credit report for free once a year by heading to annualcreditreport.com to review your credit history. We recommend checking your credit score with a parent or guardian to ensure you keep your credit information secure.
How to build credit
Become an authorized spender
If you have a parent, guardian, or loved one that you trust, ask them if you can be an authorized user on their credit card account. Becoming an authorized spender allows you to make purchases and can help you establish your credit. You will receive a credit card with your name on it, but the primary account holder is ultimately responsible for making payments. Before signing up to be an authorized user, have a serious conversation with the person whose account you want to join about expectations for immediately paying off any purchases.
Apply for a credit card
If being an authorized user on someone’s account is not an option for you and you are 18 years of age or older, apply for a credit card. Since your credit history is either new or non-existent, you may only be eligible for a secured credit card. A secured credit card requires you to make an initial deposit - typically $200-$500 - which becomes your line of credit.
For example: You apply for a secured credit card and the lender requires you to put down a $300 deposit; your credit card will then have an available credit amount of $300. As you make on-time payments on the card, you start to build a positive credit history, which can boost your credit score and help you become eligible for larger amounts of credit in the future. Your security deposit will be refunded once your account balance is paid off and the account is closed, or when your secured credit card is converted to an unsecured credit card.
Apply for a joint account
A joint credit card allows two account owners to use the same credit card account, spend and update account details, and share equal responsibility for repayment. Applying for a joint account with someone you trust that has a high credit score and a good credit history can help you build your credit. However, there is a bigger risk applying for a joint account than being an authorized user. If the person you share the account with doesn't pay the credit card bill late, or racks up a bunch of fees, you are equally responsible for that debt, and it could ruin your credit score. Choose someone who is responsible if you decide to establish your credit by going this route.
How to avoid ruining your credit
Know the basics
Building your credit takes time and skill. While it might be easy for you to get your first credit card, it can be hard to manage it if you don’t know the basics. Do you know the difference between a checking and savings account? The fee for late payments? What a good credit score is or how high your interest rate will be on your credit card? Not knowing the basics of financial literacy and the money moves you need to make can potentially damage your credit score.
Don't make any late payments
All it takes is one late payment to make your credit score drop. If you have a credit card, try your best to always pay your bill within 30 days or less. Do not skip or miss a payment. Doing so will guarantee your credit score will drop, which can signal to lenders that you are not responsible with your money. Lenders have the right to lower your available balance on your credit card, which will make your credit score even lower.
Keep your credit card balance low
Just because your credit card has $1,000 in credit available doesn’t mean you should use it all without paying it off entirely each month. In fact, one of the factors that determines your credit score is your credit utilization score. The rule of thumb is to keep your credit utilization ratio around 30% of your available credit; but the lower, the better.
Stick to one credit card
Account inquiries are one of the five factors of your credit score. Applying for multiple credit cards too fast and too frequently will make your credit score drop and it signals to lenders that you might not be responsible with money. It also puts you at risk for going over budget and spending too much money on things you don’t need or can’t afford.
Pay all of your bills on time
On top of paying for your credit card bill on time, it’s important to pay ALL of your bills on time! This includes rent, cell phone payments, utilities (electricity, water, gas, etc.), car payments, and more. If you are late on some of these payments, it can damage your credit score. Having a budget is useful to help with this.
While having a credit card earning credit seems intimidating, it’s essential to having financial security and stability! If you have any questions about how credit works, we recommend talking to a parent/guardian or a trusted adult in your life.
As you continue to learn more about getting your finances together, be sure to check out the rest of our FREE money management resources to learn how to be a smart spender and saver! And if you have any job or finance-related questions for us be sure to text #Jobs to 33-55-77 (If you're using a mobile device, click here to have the text message set up for you).