Advice for Teens on Credit

Anyone who wants to apply for a credit card, car loan, apartment, or other type of loan must have good credit. Teenagers will benefit later on by learning how to build credit now. The most essential credit advice for teens to know is what determines a credit score, how to read a credit report, what credit history is, and how to build credit.

A credit report is what?

A credit report contains information about a person's credit history from banks, credit card companies, collection agencies, and even the government.

Chip Griffith, senior vice president of retail sales and operations for OneAZ Credit Union in Phoenix, stated that "your credit report offers potential lenders and creditors a summary of your credit history."

In your credit report, you'll find details like the name of the creditor, the kind of credit (like a car loan or credit card), the date the credit was issued, the credit limit, the total amount of the debt at the time of reporting, and the debt's payment history. A credit report will also detail any bankruptcies and debt-related collection efforts involving the borrower.

Equifax, Experian, and TransUnion are the three credit reporting agencies that gather the data on a credit report, and consumers can obtain copies of those reports.

A credit score is what?

A credit score is a three-digit number that ranges typically between 300 and 850 and gives you an instantaneous assessment of your credit risk. It is founded on data from a credit report.

According to Griffith, "many businesses quickly glance at your credit score to show your spending patterns and whether you've ever been late on a payment." Teenagers will need to consider this later in life when trying to purchase expensive items like a car or home. 

Your teen will create a credit report and credit score as soon as they start using credit.

The five factors that make up a credit score are payment history, debts owed, length of credit history, new credit, and credit mix.

The single most important factor in determining a credit score is payment history. A credit score will be permanently negatively impacted by missed or late payments, and it may take months or years to repair this damage.

According to Griffith, even one late payment can remain on your credit report for seven years.

He emphasized that while a late payment may incur a late fee, it might not affect the borrower's credit score. A late payment undoubtedly will.

"That late payment will hurt your credit for years to come if you ignore it and it turns into a missed payment," he warned.

Your teen will develop the habit of never missing a payment if you teach them how to pay their bills on time. This can assist them in getting ready for future payments on credit cards, loans, mortgages, and other obligations that will affect their credit score.

Understanding Credit Scores

If you have a bank account or credit card, you might be able to find your credit score in your online account or on the mobile app. You can find your credit score on free websites like Credit Karma.

Between the range of 300 and 850, there are categories that indicate whether your credit score is poor, fair, good, very good, or excellent.

When you check your credit score, for instance, and see that it is 750, you are, according to both FICO and VantageScore, in the Very Good or Prime credit score range.

 And suppose you want to submit an application for a personal loan with your bank. You would be qualified to apply and possibly obtain a lower interest rate for that loan if your bank states that borrowers with a Very Good credit score or higher may qualify for the lowest interest rates. By educating your teen at a young age, you can help them understand when they might be qualified for a loan or credit line.

How Important Is a Credit Score?

Teenagers can discover early on the importance of establishing credit and obtaining a credit score in order for lenders to decide whether to approve their loan or credit card application.

"When you go to buy a car, a house, or even to rent some places, the lender will look to your credit score to ensure you have a history of paying your debt on time," Griffith said.

When you apply for a job, some employers might also check your credit score.

 And when determining auto insurance rates, insurance companies frequently check credit scores.

How to Improve Your Credit as a Teen

Teenagers should begin by developing sound money management skills before working on their credit score. Teenagers have the perfect opportunity right now to learn how to make and maintain a budget. Knowing how much money they have to spend can greatly aid in teaching them how to pay their bills on time, which is essential for developing a positive credit history and score. Teenagers who effectively budget their money can stay on track with debt repayment once they begin requesting and using credit. Here are a few ways teens can begin to establish their credit.