How to Help Your Teenager Build Healthy Credit Habits

Helping your teen learn money habits early, like how to build credit, can get their financial future off to a good start. A strong credit score can also help them receive better financial offers, qualify for more favorable interest rates and get approved for leases as they get older.

While teenagers need to be 18 to open credit on their own, you can help your teen prepare for the years to come by teaching them healthy financial habits.

6 ways to support your teen as they prepare to build their credit score

Taking positive steps early and often to help teens build their credit scores sets the foundation for a strong financial future. Let’s look at some simple ways you can help your teen get started.

1. Help your teen understand how their credit score works

Knowing how credit bureaus calculate credit scores is the first step to building a healthy credit history.

There are three primary credit bureaus — Experian, Equifax and TransUnion — that gather the information to generate credit reports. Each bureau calculates credit scores a little differently based on the credit scoring model it uses. A credit scoring model is made up of the various factors the bureau determines are important, and each bureau assigns the factors with different weights to calculate a credit score.

While the credit bureaus are the most reliable sources for what affects credit scores, these factors tend to carry the most weight:¹

Account history

A credit score reflects how many credit accounts a consumer has, how many carry a balance, and how long the consumer has had them. Typically, the longer someone has had credit accounts and made payments on time, the higher their credit score.

Credit utilization ratio

A credit utilization ratio measures how much available credit a person is using, and it’s a key credit scoring factor. A consumer’s credit utilization ratio is calculated by dividing their total credit card balances by their total credit limits and is reflected as a percentage. Consider encouraging your teen to keep their credit utilization ratio below 30%, which may strengthen their credit score and show they manage credit responsibly.

Payment history

Making payments on or before the due date can improve a credit score over time. On the other hand, missed and late payments will lower the credit score. For that reason, remind your teen that making on-time payments every month is a key factor in boosting their credit score.

Credit application history

When someone applies for new credit, the lender requests a copy of their credit report. This is called a “hard inquiry.” Hard inquiries cause a small, temporary dip to the applicant’s credit score, but they’re a necessary part of getting new credit. However, too many hard inquiries in a short time could lower someone’s credit score more significantly.

Checking for prequalified offers can help minimize credit score impact. Prequalifying could help give a consumer an idea of their chances of approval once they submit a formal application, and it doesn’t affect their credit score.

Types of credit used

Credit mix refers to the different types of accounts on a person’s credit report. Having multiple kinds, like an auto loan, credit card and a student loan, could benefit a person’s credit score — as long as they manage the debt responsibly.

2. Consider a shared credit card

If you have a strong credit history, you can help your teen build their credit score by adding them as an authorized user on a shared credit card. An authorized user is someone who has permission to use your credit card but isn’t responsible for the bill. When your teen is an authorized user, the account will show up on their credit report.² Note that some credit card companies have age minimums for authorized users, so be sure to check with yours.

Sharing a card allows your teen to start building a healthy credit score early, which may make it easier for them to qualify for credit on their own in the future. If you involve your teen in the process of making payments, they’ll also build real-world experience managing credit and learn about responsible credit card use.

Accountability is key, though. Be upfront with your teen and explain the benefits of using a shared credit card to establish a credit history, as well as the harm that overspending or missing payments could cause to both your credit scores.³ It’s important for you to use the card responsibly as well — if you make late payments or carry a high balance, that could affect your teen’s credit score, too.

3. Work together to open a checking account

You can support your teen as they learn financial responsibility by helping them open a bank account. Some banks offer special accounts for teenagers that you share with your teen as a joint account.⁴ If your teen is over 18, they can open their own account but might still need guidance to get started.

Although bank accounts don’t appear on credit reports, lenders may use a bank account to verify an applicant’s identity and income.⁵ Some lenders also require applicants to have an account to deposit funds. Keeping a steady balance can show financial stability.

4. Help your teen apply for a secured credit card

If your teen is over 18, they might want to consider a secured credit card. A secured credit card is similar to a traditional credit card, but it requires a refundable deposit that typically equals the credit limit, which is the maximum amount you’re allowed to charge on the card. A secured card could be a good fit for young adults with no or limited credit history.⁶ Your teen can use their secured card for everyday purchases, like filling up their gas tank or buying new books for school. Managing the card responsibly and making regular, on-time payments may help your teen qualify for more favorable terms when applying for new credit accounts in the future.

5. Put your teen in charge of phone payments

Having teens pay their own monthly cell phone payment may help build credit — with a few extra steps. While phone and other utility bills aren’t automatically reported to credit bureaus unless they’re in collections, some credit bureaus offer a service to link payment history for utilities and rent to credit history.⁷ Consider encouraging your teen to have the payment automatically deducted from a checking or savings account to limit late or forgotten payments that could damage your teen’s credit score.

Even if you don’t take the extra step of reporting to credit bureaus, making your teen responsible for a regular bill can help them get experience with budgeting and keeping track of payments. Learning these financial skills early can help set them up for success.

6. Have your teen participate in OneMain’s Credit Worthy program

OneMain’s free Credit Worthy program gives high school students the opportunity to build the practical knowledge and skills they need to become financially capable adults. Credit Worthy teaches the following topics through hands-on digital courses:

• The importance of building credit
• How to evaluate credit offers
• Using and managing credit
• When it may make sense to use loans
• How to avoid and correct debt problems
• Their rights and responsibilities when it comes to their credit report

You can ask your teen’s school to join the program or explore the program’s free resources online.

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Take your teen from allowance to credit balance

With some support from you, your teen can learn to establish a strong credit history with small steps that add up to big results. Building smart money habits and understanding how credit works are important building block to a successful financial future.

This article has been updated from a previous posting on April 7, 2022.

Sources

1 https://onemainfinancial.everfi.com/wp-content/uploads/2022/08/Your-Credit-Score-Matters_OneMain-Financial.pdf
2 https://www.experian.com/blogs/ask-experian/what-is-credit-card-authorized-user/
3 https://www.experian.com/blogs/ask-experian/how-to-help-your-teen-build-credit/
4 https://www.nerdwallet.com/banking/learn/how-to-choose-a-teen-checking-account
5 https://www.cnbc.com/select/how-bank-accounts-impact-credit/
6 https://www.equifax.com/personal/education/credit-cards/articles/-/learn/what-is-a-secured-credit-card-do-they-build-credit/
7 https://www.experian.com/score-boost/