Your credit score can impact many different aspects of life, including whether or not you qualify to rent an apartment, take out a loan, or how much interest you can be charged for a loan. Helping your teen build their credit score can give them a foot up when starting their adult life. Listed below are a few ideas to help your teen build financial credit and be ready for financial success.
Disclaimer: Organized Mom.net is sharing general consumer information in this article. This is not legal advice or regulatory guidance.
Talk to Your Teen About the Importance of Building Good Credit
It can be helpful to talk with your teen about how credit reports and scores work, and why they are important. Start with an explanation about how credit reports are used by financial institutions and landlords to gauge how financially trustworthy an individual is. If a person is late on their payments or they have unpaid bills than a bank is less likely to give them another loan, and a landlord is less likely to rent to that individual.
Credit Scores and Credit Reports
There are three national credit bureaus in the U.S., they are: Equifax, Experian and TransUnion. These credit bureaus create and track your credit report. Your credit report is a record of your credit history. It includes information about whether you pay your bills on time and how much you owe to creditors. Banks and lenders can review your credit report to calculate your debt to income ratio. This helps them to determine if you qualify for another loan.
A credit score,on the other hand, is a number that is based on the information in your credit report. Your credit score changes over time as your credit report either improves or declines. Credit scores range from a low of 320 to a high of 844. Your credit score can affect whether or not you can get a loan. Plus, how much interest you’ll be required to pay for that loan. Often the lower (worse) your credit score is, the higher interest rate the bank will assign to you.
What Exactly Does the Credit Report Score You On?
These are only a few of the items your credit score is based on. I’m only going to list but the three items that have the biggest impact:
- Payment History: Whether you make your payments ontime, or if you let them go past due.
- Length of credit history: How long you’ve had credit. This is why it’s important to help your teen establish credit as soon as possible.
- Amount Owed: Are your credit cards maxed out to the limit? Or do you keep the balance lower? It’s often advised to keep your balances at less than half of your total card limit, if you want to have a good credit score. For example if you have a credit card with a $1,000 dollar limit, then you never want to carry a balance over $500.
Help Your Teen Open a Line of Credit
Instead of a regular credit card, see if your credit union or bank offers a “Secured Credit Card”. This type of card is set up specifically for people to build or repair their credit. You or your teen will need to supply the funds for the credit card limit upfront. Then your teen will borrow against this money. This can be beneficial because there is no risk for the bank or for you as the parent. It allows your teen to show that they can make payments on time and establish their credit.
Try Experian Boost
Unless they become delinquent, typically utility bills including: electricity, water, gas, and phone bills are not reported to the credit bureaus . Then they are reported negatively. With Experian Boost though, all of your payment history for the past two years will be added to your credit report. Which means as long as your teen has been paying their phone bill ontime, then this will show up positively and help them establish credit.
I hope these ideas help you start a conversation with your teen about the importance of building and protecting their credit report as they venture into adulthood.