Building credit is a critical step on the journey to long-term financial success. Credit scores are like a key to unlocking what may have been luxuries in the past, but will soon be basic necessities, like getting a car, renting an apartment, taking out a loan, and more.
Good credit scores signal to the world that you’re a trustworthy individual who engages with the economy responsibly and holds themselves accountable. On the other hand, it can feel like bad, or even fair credit scores, signal that you're either irresponsible when it comes to finances or completely out of the loop
As if all of that wasn’t enough for parents to figure out how to explain to kids, one of the critical components of a “good” credit score is credit history, including for how long and how consistently we’ve paid our bills on time. With credit history being such an important part of our credit score, building credit earlier can give you a leg-up on a good credit score.
But when many of the ways we build credit involve taking out and repaying loans, getting a credit card, etc., how can our kids and teenagers build credit? And more importantly, build credit safely and smartly?
Till’s here to help. While we can’t magically bestow a 750 credit score on your teenager, we can help you teach them about the importance of credit scores, things to avoid, and tips to building good credit.
Ways to build credit
Before we dive into teen-specific ways to improve credit scores, let’s cover some of the traditional ways people can build credit.
As mentioned above, how we build credit can sometimes feel a little counterintuitive. To prove we’re dependable and reliable in paying back money we borrow, we need to first borrow money. But in order to borrow money, lenders often want to see good credit.
To tackle this, people may try things like taking out small loans they know they can pay back. You can even set up auto-pay to ensure you don’t miss a payment, or pay off the loan early.
Borrowing money isn’t the only way to build credit. In general, banks want to see that you pay your bills on time. So ensuring that you make your recurring payments on time and in full (or at least the minimum payment) will also help you build credit.
There are lots of good reasons to pay your bills on time, but building credit can be an added bonus! In some cases, you can even report your rent to the credit bureaus directly to help build your credit.
Overall, when we think about how to build credit, we want to prioritize making payments on time. That includes our phone bills, school bills, rent or mortgage payments, appliances or other items purchased on credit, and any other recurring payments.
Now that we’ve covered the common ways we build credit, you might be thinking, “So how the heck is my teenager going to build credit when they don’t do any of those things?”
Thankfully, we have some ideas.
Building credit as a teenager
To level set, a lot of the ways that are available for teens to build credit mimic the things we’ve already discussed. If your teenager has any bills in their own name (like a phone bill), those payments will apply to their credit history.
Student loans are another way teenagers may build credit when they’re going to college. Keep in mind, though, the importance of paying those loans on time and in full cannot be understated (and by the time student loans are paid off, your kid is probably no longer a teenager). Missed or late payments damage our credit, so you should ensure your teen only takes out loans they’re capable of paying off on time.
Credit cards are another way teens can build credit, though most credit cards come with credit score requirements. Still, there are a couple ways you can use credit cards to help your teen build credit.
Secured credit cards to build credit
One way is to have them apply for a secured credit card. Unlike a typical “unsecured” credit card, secured credit cards require a down payment. That down payment then acts as the cardholder’s credit limit.
They can’t spend more than the amount of the down payment and they still have to pay off the bill each month. The benefit of secured credit cards is that they typically have lower credit score requirements, and still help build credit.
Authorized user to build credit
Another credit card-related way to build credit (without your teen taking out their own credit card) is to add them as an authorized user to one of your credit cards.
By adding them as an authorized user, they’ll have access to your credit line through the card. That means they can spend that money just like you can, so being firm in what they are and aren’t allowed to do with the money is critical.
Adding your teen as an authorized user on your credit card helps them build credit by essentially applying your credit and payment history on the card to them. This can be very beneficial for them if you have good credit.
But it’s important to note that anything your teen does with the line of credit will also be applied to your personal credit. So if they overspend on the card and don’t make payments on time, your personal credit will suffer.
Steps to building credit
If you’re not quite ready to get your kid a secured credit card or add them as an authorized user to a card of yours, don’t worry. There are still things you can do to help your kid prepare for their financial future, and equip them with the right tools to build credit when they’re ready.
As we mentioned, credit scores are essentially ways to quantify how trustworthy and reliable an individual is with money. So while your kid might not be at the point of needing their own credit card, teaching good money habits now can certainly help them down the road.
Things like creating and sticking to a budget, how to optimize your spending, ways to save and more are all critical skills on your kid’s journey to smarter spending. They can practice these skills using Till features like Save Goals and Spending Insights, and get real-world practice using their free Till debit card. By the time they’re ready to apply for their first credit card or personal loan, they will be smarter spenders and you can feel confident that they are set up for success.
