Teens will have a credit score as soon they keep one credit account open for about six months, according to FICO. Though they might not realize it, the credit history teenagers start to develop will have a huge impact on their lives, from the interest rate they receive on their first auto loan to the kind of credit card they can obtain in college. Because of this, parents need to make sure their children are well-informed about the benefits and pitfalls of managing credit, and how to build a great credit score.
A recent 2014 study by the Federal Reserve Board in Washington, D.C., found poor credit (larger account balances and delinquency on credit accounts resulting in credit scores dips) directly increases a young adult’s likelihood of suffering financially and needing to move back home. People with poor credit face higher costs of borrowing and limited access to credit for car loans and mortgages, as well as limited life choices, since landlords, cell phone providers, utility companies and employers often screen applicants using credit scores.
Keep in mind, everybody’s FICO credit score (regardless of age) is calculated considering five main credit categories:
- 35 percent: payment history
- 30 percent: amounts owed
- 15 percent: length of credit history
- 10 percent: new credit
- 10 percent: types of credit
You can improve your teen’s credit score in every category by using any and all of the strategies below.
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1. Make Your Teen an Authorized User on Your Credit Card Account
This way, you can teach financially responsible young adults about credit and help them establish a good payment history in their own name before they turn 18. As an authorized user on the account, you can still monitor the card’s usage and correct mistakes. On the other hand, if you cosign your teen’s credit card, you won’t be able to monitor or control spending — but you will bear all the liability for any missed payments. Keep the joint credit card limit at $500 or less (by calling the card issuer and requesting a lower limit) to minimize the possibility of a high amount of unwanted debt if your teen decides to go on a shopping spree.
2. Suggest Your Teen Get a Job
If your teen runs out of money and asks you for more funds often, suggest that he find an outside source of income. A job teaches the important financial lesson that a dollar is worth far more when you’re the one earning it. What’s more, your teen will get valuable, on-the-job experience for his resume and college application, and will be able to start putting paychecks into a savings account.
3. Plan Now to Keep College Student Loan Debt Low
High amounts of student loan debt are a drain on your kid’s future income and can cause financial stress that results in late payments and further credit card dependence. Work with your teens while they’re in high school on a plan to take out the fewest student loans possible. Attending community college for the first two years is one way to reduce student loan debt and living expenses. Other college tuition savers include applying for scholarships, staying vigilant about the FAFSA and making use of catered savings accounts, like the 529 savings account.
Without this credit and financial training before they are 18, young adults can make financial mistakes that make it hard for them to manage their money and live on their own and no parent wants that!
Photo credit: Nic McPhee