As parents, you want to do the best you can for your kids by teaching them good habits from an early age. While wanting to do everything for them, sometimes all you can do is show them the best way to do something, provide encouragement and pointers and then leave the rest in their hands.
This matches the experience many parents face when worrying about how to help their teenagers start building credit. Credit-building is a journey that takes time, dedication and perseverance.
In this article, we’ll discuss at what age you can start building credit as well as when and how you should start working on building your teens’ financial futures.
Let’s jump in!
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Best Way to Build Credit Under 18
At What Age Can You Start Building Credit as a Child?
Building credit serves as a lifelong accomplishment which provides significant benefits. However, much like Rome, credit isn’t built in a day.
Credit requires persistence, attention to detail, wise money management and a strong command of personal finances. Therefore, starting early can yield untold benefits as you age and have evolving credit needs for purchases like a new car, house or even starting your own business.
Building credit in your teen years, while it takes some time and effort to earn a score that will be favorable when the need for borrowing comes up, can pay off in significant ways. This represents your first chance to begin building credit.
One first step for teenagers to build credit involves riding on the coattails of their parents through becoming an authorized user on an existing credit card.
Further, many other products exist once reaching adulthood to begin building credit and burnishing a respectable credit history—and that doesn’t just mean having a bunch of credit cards in your wallet! Some, like Step Banking, even allow teens to begin building their credit history before turning 18.
We’ll cover these and more below. First, let’s start with a deeper look at what credit is, how you build a credit history, what factors go into it, how to check your credit history and the best ways to start building credit.
What is Credit?
Credit is the concept of borrowing money to pay for goods or services today with the implicit understanding you will repay it later—usually with interest.
Credit works when someone, usually a bank, credit union, credit card company, or other financial institution, lends you money through a loan or line of credit.
They extend this money to you with the understanding that you will fully repay them at some point in time from now until the future.
Your credit score, or a single numerical value which sums up your creditworthiness, shows your likelihood of doing so based on a number of credit factors including payment history, diversity of credit, timely payments, credit utilization ratio and more.
Credit can come through fixed term loans, revolving credit lines, variable interest rate loans, as well as other borrowing/lending arrangements.
They all share two common features: you accept someone else’s money today with the understanding you will repay it (usually with interest) in the future.
It’s important to understand what credit is and how it can help you in the future. Further, it can improve your circumstances to understand what types of credit products are available and which ones would be best for your needs.
Your credit score will go a long way to determining which credit products you can access.
What is a Credit Score?
Your credit score represents a single measure of your overall creditworthiness, though the models used vary.
Your credit score usually falls in a range between 400 – 900, though alternative models exist with slightly different ranges. Higher scores indicate better credit and can make you a prime borrower, whereas lower scores place you in the subprime borrower category.
Numerous credit scoring models exist and lenders can pick and choose which one they use when evaluating your creditworthiness. A common system lenders rely on for understanding the risk of lending to a potential borrower is the FICO Score system.
This model scores your financial decisions and weighs items such as how much existing credit and lines of credit you have as well as how you repay your outstanding debts in a timely manner.
To earn scores in the higher brackets (i.e., more creditworthy) and land the best credit terms, you will first need to establish credit and then build your credit over time. This will result in a solid credit profile.
This involves making timely payments (don’t be late!), restricting how often and how much you rely on credit (low credit utilization ratios), how long your accounts have been open, your mix of credit, among other items.
When you want to take out a loan or credit card, or otherwise apply for credit, lenders will assess these credit scores to determine your eligibility for credit, as well as what terms they feel comfortable offering you.
For the remainder of this article, I will dig into some of these factors, starting with your credit mix. Your diversity of accounts can have a strong impact on your credit score. Because of this, you will want a good combination of credit cards and loans on your credit report.
The following sections address some financial tips you can put to use to begin building your credit profile and increasing your credit score today.
What Goes into a Credit Score?
1. Timely Payments
Making timely payments is important for your credit score, representing as much as 35% of your total FICO score. Missing one payment can have a negative impact on your credit score, though it shouldn’t ruin it entirely. Why such a big impact?
Lenders want to assess your ability to repay debts in a timely manner, meaning you pay what you agree to pay when you agree to pay it. Do this consistently and over long periods of time and you will see your credit score increase. Because of the outsized importance of this credit factor, staying on top of payment due dates and amounts becomes a necessity to build credit.
Keep track of when payments must go to creditors by setting up automatic payments where possible. Setting your bills on auto-pay can save not only time for individually initiating each payment, but also the headache of being late and dinging your credit score.
2. Credit Utilization Ratio
Your credit usage, especially in relation to your available credit, can determine your credit rating as well. The metric used to measure this credit usage, called the credit utilization ratio gets calculated by dividing your outstanding revolving credit balances by your total available revolving credit balances.
This ratio provides valuable insight to creditors about how you use credit. Lenders want to know how much credit you are using, especially in relation to how much credit is available to you. A high credit utilization ratio (above 30%) will likely hurt your credit score while a low one (below 20%) may help it or not have any effect at all on your credit rating.
This accounts for 30% of your credit score.
3. Credit History
Lenders want to see how long you’ve had credit and how well you’ve handled while open. This credit factor can determine 15% of your FICO score by evaluating the average age of your open lines of credit.
All things equal, longer average credit histories result in better credit scores.
4. Credit Diversity (Mix of Credit Lines)
Not only do lenders care about your credit history and your ability to make timely payments (both huge credit factors), but they also like to see a diversity of good credit opportunities you’ve had in the past and maintain today. Children won’t have many opportunities to have a wide array of credit lines, but they don’t need these just now.
Instead, they can start with a single line of credit as an authorized person through a family member’s existing or new credit line. If teenagers start building credit now, this new line of credit will still help them in the long-run so long as the account remains open. Another powerful option that places a credit card with secure guardrails in their hands: a Step Banking secured credit card.
Step (Best Secured Credit Card for Teens)
- Available: Sign up here
- Type of credit card: Secured
- Builds credit: Yes
The Step Visa Card is a unique “hybrid” secured credit card that’s tailor-made for kids and teens. It functions just like a Visa credit card, but it offers the safety features of a debit card—and most importantly, it can help build your child’s credit history.
Parents, who sponsor the card, can opt to have Step report the past two years’ worth of information—transactions, payment history, and more—to the credit bureaus when their child turns 18. Credit scores are assigned once someone turns 18, and most teens will begin with a score of under 600. But based on a Step survey, 18-year-olds who used Step for at least seven months had an average credit score of 725.
How much of a difference could that better credit make? Step says that an 18-year-old user with a score of 725 could expect these kinds of savings compared to users with lower credit scores:
- Car insurance: $147 per month instead of $250 per month
- Student loan: 6.24% interest rate instead of 10.46%
- Security deposit: 1 month’s rent instead of two months’ rent
Step also provides a seamless experience for teens who “graduate” into young adulthood. When they turn 18, Step allows cardholders to keep their old credit card number and account, doing the legal heavy lifting in the background to get them appointed as the legal owner of their account, and transitioning them to an independent account. Everything—from how they access the app to their account numbers to their investments—stays the same from their perspective, and Step continues reporting credit on the same “credit line,” which allows them to keep building their credit history.
In other ways, Step acts like a debit card.
Parents can add money directly into their child’s FDIC-insured Step account. A regular Step account allows a child to have both a physical spending card as well as a virtual card in the Step app, while a Parent Managed Account only allows the child to spend via a physical card. Children can use both the virtual and physical cards to spend anywhere Visa is accepted, and they can use the physical card to withdraw money for free at more than 30,000 ATMs.
And parents needn’t fear their child overdrafting—they can’t spend any money they don’t have.
Other features include Savings Goals, where any money saved can generate 5% in annual interest (compounded and paid monthly) with a qualifying direct deposit*; Savings Roundup, where purchases are rounded up to the nearest dollar and the overage is put toward a Savings Goal; an “invest” function that allows users age 13 and older to buy and sell Bitcoin; and opt-in cash or Bitcoin rewards from companies including Hulu, Chick-Fil-A, CVS, and the New York Times.
The Step Card is protected by Visa’s Fraud Protection and Zero Liability guarantee. That means if your teen’s card gets lost or stolen, or misplaced and fraudulent charges crop up, you can dispute the charges within a certain time frame to avoid liability for paying.
5. New Attempts to Access Credit (Inquiries)
Creditors also want to see how often you seek new credit. By going after financing regularly, it may indicate an increased risk because you constantly seek new forms of financing to make your finances stay afloat. Whether true or not, this can still serve as a red flag on your score, potentially hurting your credit if done too often.
These pulls on your credit, called hard inquiries, stay on your report for two years or longer, depending on the type of inquiry. A child shouldn’t worry too much about this as any inquiry that hits their report now will likely fall off before they need it. At this age, the child wants to establish credit and slowly build their credit limit through having smart credit use and a longer credit history.
What is a Credit Report?
A credit report is a statement which presents all the information pertaining to your credit activity, including past loan payment history as well as current credit accounts which you pay. Lenders review your report to assess whether you have good credit and share it with you once they have pulled it. Though, you don’t need to wait for a prospective lender to give you your report.
Fortunately, the U.S. government has mandated the three major credit bureaus (Experian, TransUnion and Equifax) each provide one free copy of your credit report per year at annualcreditreport.com. These agencies keep track of your information by gathering information from creditors, lenders, and other companies you make regular payments to for satisfying a debt or expense.
However, creditors do not need to report your information to each agency, nor do all of your financial transactions get reported. If your child has a debit card for teens, the spend history doesn’t count as a debt repaid because your child spends money they already have rather than borrowing from someone else to make a purchase.
- How Old Do You Have to Be to Have a Debit Card?
- How Old Do You Have to Be to Open a Bank Account?
- Opening a Child Bank Account with Debit Card [Kid’s Debit Card]
How Often Should You Check Your Credit Report?
You can never have too many options, so when it comes to ordering your credit reports, annualcreditreport.com has you covered. That means that if you’re in the mood for pulling one report, two or all three, each is available with a few clicks of a button or taps of your finger!
However, you might space these out throughout the year to keep an eye on your reports year-round. This way, if nothing hits your report during one pull, you still have two more left during the year to check later.
A handful of reasons for why you should periodically request your free annual reports:
- Info in the report determines your access to credit. The information contained in your credit reports can directly impact your ability to access credit and how much you will pay for borrowing money.
- Accuracy of info is critical. Ensuring the accuracy of the information becomes important before you wish to apply for a major loan on a home purchase, a new car, buying insurance, or even applying for a job.
- Protect yourself from identity theft. Checking your credit periodically can protect you against identity theft. This occurs when someone unlawfully acts as you by stealing your personal information — like your name, your Social Security number, or your card number — to commit fraud. Identity thieves can open new lines of credit in your name, amass debts which they never pay, leaving you on the hook. When these bills don’t get paid, the delinquent accounts show on your report, potentially affecting your score, and by extension, your ability to apply for credit, insurance, or even get work.
Thankfully, to help you build credit, you can dispute errors seen on an account or anything which looks suspicious and affects your credit scores with the credit bureaus.
Because you’ve worked hard to build your credit, or your kids want to learn how to build good credit and not see it tarnished, you should be vigilant in ensuring your reports don’t contain inaccurate information.
What is the Best Way to Start Credit Building?
For minors, there are two best ways to start building credit (1) adding them as an authorized user to credit cards or (2) opening a secured credit card product specifically designed for teens and young adults like a Step Secured Credit Card.
Making a child an authorized user will grant them access to your account and potentially have your credit history start to become their history. Providing authorized usership to lend your good payment history to your children might make good financial sense, however it won’t have the same impact as having their own card but it’s certainly a good place to start. (You can even initiate adding them to your account without handing them a physical card, meaning they’re only authorized on paper!)
Providing your child with a secured credit card targeted towards teens and young adults is another opportunity to help your teen build credit. A new product from Step Banking (detailed more above) offers an innovative way to accomplish this desired objective.
Likewise, you can also pursue other alternatives once they reach adulthood if you’ve had your own credit setbacks or your own credit experience is rather limited. You can use other credit building tools and actions like:
- Getting an unsecured credit card with low credit score requirements (e.g., the Petal credit cards, which have a low spending credit limit and no annual fees)
- Paying off student loans
- Applying for a credit builder loans
- Using products like Experian Boost, which take into account payment history on housing and utilities in your score
If they become college students and look to build credit, you might even apply for special college student credit cards that offer bonuses for good grades and other perks which appeal to that age group. Just the same, you can find a checking account, savings account and other bank accounts to help with managing money as part of a comprehensive financial system.
Should My Child Become an Authorized User on My Credit Card?
Like almost any child, they likely have no credit history to speak of, as they’re only a minor who hasn’t held a credit card or any other form of loan in their own name. That said, teenagers can still begin to build credit through participating on the credit card account of a family member, allowing them to develop good credit habits and learn how to manage their money or enrolling in a secured credit card.
You might consider adding your child to an existing retail or major credit card you have as an authorized user. The paperwork for this arrangement rarely requires filing a card application. While this usually works, be warned about the effectiveness of adding a user to your credit card in some instances. Many credit card issuers report this information to credit bureaus showing your child as a user with spending privileges.
For reference, adding an authorized user to your account grants them the ability to make purchases with their credit card. As said before, credit card companies may choose to report this info to credit bureaus, showing usage and payment activity on their report as well.
The main difference between an authorized user and having the account in your own name comes from the user not holding responsibility for making the monthly payments to the card issuer. Previously, going this route often served as the only true option available to minors. Now, a product like the Step Secured Credit Card can assist with building credit under the age of 18.
How Else Can My Child Begin to Build Credit?
If you need other opportunities to begin building credit, consider the following options:
- Secured Credit Card
- Get a Credit Card (Unsecured Credit Card)
- Student Loan
- Credit Builder Loan
- Car Loan
- Pay Bills on Time (including Rent Payments)
These products don’t usually apply to teenagers, as many require you to be an adult to apply or to have an adult co-sign. However, these things can assist as a way to build credit and serve as solid steps toward building more credit.
What Signs Show My Children Are Ready to Build Credit?
Undoubtedly, no one knows your children better than you—and that means knowing what they can and can’t handle. You might think they’re not ready or mature enough to handle an unsecured credit card on their own, even as an authorized user. That’s not a problem, as you can apply for this designation without actually needing to hand them any physical credit cards. This allows you a chance to build credit in the background.
As a usual rule of thumb, if you find yourself trusting your teenager to drive the car around with a license, they might have enough responsibility to handle a card. If nothing else, they need some form of credit card with them in case they get stranded and need financial assistance. Others find waiting until college as a perfect opportunity to open credit cards for teens for their financial needs. There’s no wrong answer, as each child is different.
Instead of diving straight into getting them their own credit cards, you might start first with bank accounts and prepaid debit cards for teens. These will do well for establishing an emergency fund while also preventing the accumulation of any debt because they can only spend what they have on a debit system.
Teens should start by getting an allowance, for which payment is expected. This teaches them that their money doesn’t grow on trees—rather, it’s something hard-earned from parents (or even grandparents!). Consider opening a chore app with a debit card to start paying them an allowance and see how they handle this financial responsibility. These work as prepaid debit cards and can hold allowances paid to kids. Give your kids the opportunity to make some mistakes with small purchases—much easier to handle these than big mistakes down the road.
Before setting off on your credit building journey for your teen, you’ll want them to demonstrate an interest in managing money as a teenager, presenting honesty about money, and having a sense of maturity overall. Possessing these qualities make them good candidates for finding ways to build credit earlier.
Related: Best Credit Cards for Kids