Your teenage years are the best time for building a strong credit history.
At first, you’ll not have a credit history until you start maintaining a credit account in your name. So, when you first open a credit account such as a credit card, or when you are added as an authorized user of your parent's credit card, your credit report will be created.
For teenagers, a good credit history and a good credit score are very essential. But having a good credit score is not at all easy. Being a teenager, you might have to work hard before building a good credit score.
Teenagers might think that people who use credit cards are only adults or those who can't manage cash while purchasing things. but this isn’t the reality. The young generation is well capable of using credit cards responsibly.
But first, you need to keep in mind 2 basic requirements before you apply for a credit card:
1) Having a job - As per law, credit card providers must check the income for card applicants below the age of 21. Additionally, the applicants must have a steady income source to afford the credit card payments.
Teenagers can’t show their pocket allowance as income. So, you should have a good income source to afford your monthly credit card bills, unless you might have to depend on your parents’ income.
2) Having a savings or checking account - You need a good banking history for a strong financial profile. A good financial profile can help you build a good credit history and a high credit score. As a teenager, open a bank account and try to deposit money on a regular basis. This will create a good saving habit, too.
Once you open a checking account, ask your parents to give you suggestions on wise spending. Finally, avoid overdrafts as much as possible.
Now, your next step should be forming the strategies to build a good credit score:
- Get a low limit credit card initially
Being a teenager you can start building your credit history by getting a low limit credit card. A credit card is a very good option for building a credit history if you use it responsibly.
A low limit credit card will keep you away from overspending and get you into the habit of wise spending. Start paying off your low limit card on time. It will also a good way to build a credit history.
Gradually you’ll set up a spending limit and by default start paying the balance in full. This is important to keep your credit in good shape. Additionally, you’ll be far, far away from paying late fees and interest charges.
- Ask parents to add you as an authorized user
Most of the prime credit card companies allow parents to add minors as an authorized user. As per CreditCards.com, 5 major card issuers including Bank of America, Capital One, and Chase, have no age limit for kids for being an authorized user. But most other companies allow a minimum age, typically between 13 to 16.
As per CNN, if kids are added to their parents’ account as an authorized user, that account's information is immediately added to the kids’ credit score, as soon as they turn 17.
But if the parents fail to pay the monthly bills on time, the negative impact of the account will also be added to the kids’ credit score.
- Talk to your cell phone company
Teenagers must have a cell phone number in their name to build a good credit history. Being a teenager, you are using a company’s services and need to pay them in return within a due date. This would build your credit history. The more you pay your phone bills on time every month, the more you make a good credit history.
So, don't forget your monthly cellphone bill payments! But make sure the bill is in your name, not your family. It’s very easy if you can just remember your due date and amount. You can also set up an auto debit option.
- Apply for a secured credit card
Secured credit cards require a deposit that'll be used if you fail to pay bills on time. For example, your secured credit card might require a $1000 deposit from you, which is your credit limit. You can add more to increase your limit as and when required. However, most of the companies require a minimum deposit of $300 or $500.
If you make payments on time and manage the account seriously and responsibly, it will build a good credit history.
- Remember your student loans
Your credit score is calculated using your credit utilization and credit history. The better your credit history, the higher your score will be.
Being a teenager, your student loans are the biggest debt you might have right now. So, if you can play nicely and manage your student loans responsibly, it might give you a great credit boost.
So, what do you need to do?
- Make your student loan payments on time, each month.
- You can opt for student loan refinancing to make your loan more manageable.
You can set up automated payment instructions with your bank so that not a single payment would miss.
- Don’t forget to check your credit report once a year
You might know about the three major credit bureaus - Experian, Equifax, and TransUnion, and what they do.
These credit unions will provide you a free report once in every 12 months. You can also visit www.annualcreditreport.com and get your free credit report.
Checking your credit report is very important. You can not only know your financial standings but also identify the bad items listed in the report. Apart from that, you’ll know how many credit accounts you have in your name.
Sometimes scammers and fraudsters may open credit accounts in your name illegally, without your knowledge. That credit account(s) will also be reported on your credit report. So, if you check your credit report regularly, you’ll know about such scams sooner and can fix it.