How to build credit for teens
Consider these tips to help your teen get off to a good start with their own savings, secured credit card and more.
Building a credit history can take time, and credit may be needed to achieve some financial milestones like purchasing a car or renting a place to live. Here are some tips to help get them started on their credit journey.
Teach your teen about basic financial concepts
There are helpful money habits and concepts that may come in handy before your teen is ready to go out on their own. Here are some tips that might help them become financially responsible and understand how banking, payments and credit work, in addition to contributing to their credit history.
Educate about credit basics
Having your teen understand what credit is and how it works, as well as the importance of using it correctly, can help when they have their own credit card.
Consider authorized users on your credit card
Only legal adults that are 18 years or older can apply for a credit card. Adding your teen as an authorized user on your own credit card may be a way for them to learn how credit works and how to use it responsibly. In addition, this could help them build their credit history. You could have an agreement with your teen indicating they are responsible for paying for their purchases and help them understand when payments are due.
Open a checking or savings account
Responsibly managing and maintaining a checking or savings account can show a financial institution that your teen can handle money. If the account comes with a debit card, your teen can gain experience using the card for transactions.
Get a job
Getting a part-time job may be a good exercise to help your teen understand the value of money. It will also allow them the opportunity to get into or continue the habit of saving money. In addition, it is a good way for your teen to be able to make credit card payments on a secure credit card or a student credit card, if they have one.
Pay bills on time
If your older teenager has bills in his or her name, it is very important to teach them to pay their bills on time. This habit not only helps them build credit but will help prevent them from incurring expensive fees associated with late payments.
More ways to build credit
When your teen turns 18 years old, consider these additional ways to help them build credit.
Obtain a secured credit card
A secured credit card may be a good option for your teen. It is a card where a cash deposit is made as collateral in case the cardholder can’t make payments.
The card can be put in your teen's name, and you can make the initial deposit together, which will be the credit limit for the account. Then they can use the card to help demonstrate that expenses can be handled, and payments made on time.
Monitor your teen's activities as they get into the credit habit, allowing more flexibility as responsibility is demonstrated. Once several months of purchases and payments are under your teen's belt, access their credit report and review it together to make sure everything is correct.
Explore student credit cards
These cards are designed for college students and can help a teenager or young adult build credit when used responsibly. A student credit card usually has fewer application requirements, has lower credit limits and may reward good behaviors like getting good grades. This type of card can be a good option for your older teen when building a credit history.
Look into a credit-builder loan
A credit-builder loan is designed to help you strictly build credit. With this type of loan, the financial entity does not disburse the loan to the borrower. The funds are held in a certificate of deposit or a secured savings account, and the loan will usually have an interest rate. Monthly payments are made until the loan is paid off. The money is given back to the borrower at the end of the loan term — and in some cases, it may include a portion of the interest.
For the life of the loan, the bank or financial entity will report the payment history to credit reporting agencies which may help the person, in this case a teen, build a credit history. This is a good way to not only build credit, but to create some savings.
Consider student loans
If your teenager decides to get a student loan to help pay for college, it may have a positive effect on their credit report. Many student loans are deferred, but any payments made toward the loan may help create a positive payment history. It is a good idea to explore other ways to pay for college before your child decides to commit to a student loan.
Teaching your teen early about good financial habits and money management tips may help them stay on course to financial responsibility. In addition, feel free to reach out to a State Farm® agent if you want to learn more about car insurance for teens, Steer Clear® savings or renters insurance.