Because your credit score plays a big role in your long-term money management, it’s important to learn about how it works as a young adult. We know these concepts can be tricky to understand - which is why we’re here to help! We share tips on how to build credit as a teenager. 

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 support your financial stability and success.

What is credit?

Credit, also known as a credit score, is a three-digit number on a scale of 300-850 that estimates how likely you are to repay borrowed money. Examples of borrowed money include money you’re authorized to spend on credit cards or loans you’ve been given by a bank. 

In the U.S., there are three major credit bureaus: Equifax, Transunion, and Experian. While they vary slightly by bureau, 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

Why is good credit important?

Good credit matters because it affects your eligibility to:

• Secure loans. Whether you want to buy a car or house, strong credit history will make it easier to secure loans in the future. 
• Secure lower interest rates. Strong credit history can help you secure lower interest rates on credit cards, car payments, and loans. 
• Rent an apartment. With good credit, you may have a higher chance of securing an apartment. Landlords have the right to turn down your apartment application based on a lower credit score. 
• Pay for utilities. A low credit score means you may have to pay a higher down payment or deposit for utilities like electricity.
• Land a job. In some states, employers have the right to deny you employment based on your credit history.

What factors determine my credit score?

There are 5 components that determine your credit score:

1. Payment history (35%) - Your payment history is a record of your on-time, late, and missed payments on loans and credit cards. It’s important to make payments on time, since late and missed payments may lower your score.
2. Amounts owed (30%) - 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. 
3. Length of credit history (15%) - 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.
4. Types of credit in use (10%) - Having a variety of credit types (e.g. loans or credit cards) will help boost your credit score.
5. Account inquiries (10%) - Whenever you apply for credit, lenders will review your credit score. Each time they do, credit bureaus keep track. Having too many account inquiries can lower your score.

Where can I find my credit score?

Only people with a credit history have credit scores. We recommend using annualcreditreport.com to review your credit history once a year for free. 

How to build credit as a teenager

Become an authorized spender

Becoming an authorized spender on a parent or guardian’s credit card allows you to make purchases while establishing your own credit. You will receive a credit card with your name on it, but the account holder (your parent or guardian) is ultimately responsible for making payments. 

Having a credit card is a big responsibility! If becoming an authorized spender is an option, it’s important to follow any instructions your parents or guardians give you about spending. For example, they may only allow you to use the card in case of emergency or give you a monthly spending limit. The choices you make as an authorized spender on their account can impact their credit score, so be mindful and responsible. 

Apply for a credit card

If you are prepared for the financial responsibility, you can apply for your own credit card. If you’re establishing credit for the first time, you may consider applying for a secured credit card. This type of card requires you to make an initial deposit (typically $200-$500) that becomes your line of credit.

For example, if you put down a $300 deposit, your credit card will have an available spending amount of $300. 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.

This type of card is ideal for people just beginning to build their credit history and want to start small before applying for larger amounts of credit in the future. 

Make payments on time 

Late or missed payments on different types of expenses can negatively impact your credit score. Be sure to pay all of your bills–such as your credit card, rent, cell phone, car, or utilities–on time each month. Setting up a monthly auto payment can be helpful.

Keep your balance low and pay it off in full each month

A good general rule is to spend no more than 30% of your available credit on credit cards. 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.

Additionally, paying off your balance in full each month can have a positive impact on your credit score while helping you avoid interest charges. 

While building credit seems intimidating, it’s an essential part of financial stability! If you have any questions about how credit works, we recommend talking to a parent/guardian or a trusted adult in your life.

Have any questions about building credit as a teenager? Text #Jobs to 33-55-77 to chat with one of our advisors. If you're using a mobile device, click here to have the text message set up for you!