In an ideal world, personal finance would be a vital part of a teen’s curriculum. But since that isn’t the case, it’s up to the parents to make up for society’s shortcomings.
Habits are formed through reinforcement and repetition. And once they’re formed, they’re almost impossible to break. And so starting them young is the best strategy to ensure that your teens are financially literate.
Start building their credit as soon as possible to mitigate the damage of their inevitable financial mistakes. Let’s be honest, we’ve all been there.
How to Build Credit for Minors (13-17 Year-Olds)
Minors don’t generally have credit reports since they don’t usually pay any bills, they can’t take out loans, and they aren’t allowed to own a credit card. In fact, minors aren’t even allowed to sign up for the Cushion App.
However, it’s not like teenagers aged 13 to 17 aren’t allowed to have credit reports.
It’s all a matter of finding a financial institution that’s willing to provide teenagers with a financial service that’s reported to the credit bureaus. Which we understand is easier said than done.
There are also alternative services that compile your teen’s transactions while they’re minors and then report them once they come of age.
However, the simplest and most surefire way to build credit at 17 and below is as an authorized user on an adult’s credit card.
Adding Teens as Authorized Users on a Credit Card
Most banks allow primary cardholders to add authorized users to their credit cards. Authorized users can use the said credit card to make purchases without being legally liable for the bill.
This means that both the authorized user’s credit history and that of the main cardholder are reported to the credit bureaus under the teen’s credit report. And since the responsibility to make the payments on time is shouldered by the adult, this is a relatively risk-free way of building your teen’s credit.
Adding your teen as an authorized user is also a pretty straightforward process. Some banks even allow you to do this online. If that option is not available, then calling them should do the trick.
Banks that Build Credit for Authorized Users (17 & Below)
While most banks allow the addition of authorized users to your credit card, not all of them report the information to credit bureaus. Be sure to inquire about your bank’s policies before trying to build your teen’s credit using this method.
We’ve also compiled a short list of banks that report an authorized user’s credit history to credit bureaus even if they’re minors:
- Bank of America
- Barclays (16 and up)
- Capital One
- Citi
- Discover (15 and up)
- U.S. Bank (Primary account should not be delinquent)
What’s the Policy of Credit Bureaus on Authorized Users?
| Credit Bureau | Age Limit | Data Recorded |
| Equifax | 16 | Positive and Negative |
| Experian | None | Positive* |
| TransUnion | None | Positive and Negative |
*High credit utilization will still be reported
The Credit Bureaus will create credit reports for authorized users, even if they’re minors.
However, even if your bank has no age limit on its authorized users, Equifax won’t create a credit report for your teen if they’re under the age of 16.
Equifax and TransUnion will also pass on derogatory remarks from the main account to the authorized user’s account. Potentially damaging your teen’s credit score.
Experian mostly records positive information on the authorized user’s account but high credit utilization from the main account will still be passed on to your teen’s report.
Preparing Your Pre-18 Teenager For their Financial Future
Adding your teens as authorized users will build their credit, sure. But all that is for naught unless they learn the basics of personal finance and form positive habits.
Here are 3 simple steps that your teen can follow and hopefully integrate into their routine.
1. Create a Budget
Knowing where their money is coming from and where it’s going is the best way to start their
financial journey on solid ground. Be sure to offer them various options in terms of keeping track of their income and expenses.
If they prefer having a handwritten budget then let them do so. An online spreadsheet or fintech app may be more efficient but their preference matters more. After all, using the more efficient method is useless if they don’t turn proper budgeting into a habit.
2. Create a List of Goals
Once their budget is up and running, it’s time to motivate them by having them write up a list of goals. These could be short-term goals like saving up for a concert ticket. Or long-term ones like their first car.
It’s important to note that you don’t want them to start saving up for their goals just yet. This step is just for the creation of the list. They need to complete step 3 before moving forward.
3. Build an Emergency Fund
It’s integral to always prioritize having an emergency fund, if possible. A financial crisis is inevitable. Whether it’s a car accident or being laid off, we all have to face these problems semi-regularly. Preparing your teen for these facts of life could be the difference between a small setback and crippling debt.
How to Build Credit at 18
Young adults have a wider variety of financial options in comparison to minors. The world is most definitely their oyster. But it’s important to continue to guide them so that they’re aware that there are sharks in the water.
Applying for Your First Credit Card
The first choice that an 18-year-old would most likely make in terms of building credit is the type of credit card they’d want to apply for. While 21 is the recommended age for your first credit card application, it’s possible to acquire one at 18.
Young adults just need to provide the bank with proof of income and an adult co-signer with good credit.
1. Secured Credit Card
If your teen has followed the guidelines that we set earlier, a secured credit card is not for them.
This type of credit card needs to be secured by a cash deposit which also acts as their credit limit. They also come with hefty fees and high APR. Why would anyone go for these then? These cards are for those with bad to non-existent credit.
Teens with bad credit are going to have a difficult time applying for unsecured credit cards. So they have to settle with this option until their credit score gets better.
2. Unsecured Credit Card
Most credit cards are unsecured, which means that banks are taking a risk when they lend money this way. This is why an unsecured card’s credit limit is based on your teen’s credit score, payment history, and income.
It’s also more difficult for 18-year-olds to get approved for unsecured credit. However, options like Student Credit Cards exist specifically for their demographic. And while Student Credit Cards also have high APRs, they’re still great for credit building and emergencies.
One big downside of unsecured credit is that it has the potential to ruin your credit score should you make bad financial decisions like maxing it out or failing to pay on time.
Applying for Your First Loans at 18
- Student Loan
- Credit Builder Loan
- Car Loan
Once you turn 18 you can officially apply for student financial aid from your state, apply for a car loan, and apply for a credit builder loan. But just because all these options are now available to you, doesn’t mean that you should apply for all of them.
This is where proper budgeting and goal priorities come into play. But perhaps an even better lesson here is risk management:
Credit Builder Loan – Low Risk
Among the three loans listed above, the credit builder loan carries the least risk. This is because it’s secured credit and defaulting just means you lose your deposit.
Student Loan – Medium Risk
While the risk of racking up insurmountable debt is high when it comes to student loans, there are ways of mitigating this. Qualifying for a student loan deferment, for example, can allow you to stop making payments for up to three years. Federal loans don’t even accrue interest during this time but private loans do.
Car Loan – High Risk
Car loans carry the most risk since repossession is one of the worst consequences of defaulting on a loan. This is why you need to have your budget in order, your goals prioritized, and your risk profile clarified, before making a decision.
Bill Payment
Paying your bills may seem like a mundane task but it’s one of the most common financial pitfalls. Utilities are some of our biggest expenditures and putting everything on autopay without a bullet-proof budget is a good way of drowning in overdraft fees.
Worse yet, paying your bills on time doesn’t even count towards increasing your credit score. Unless you use an app like Cushion, that is.
The Cushion App doesn’t just help you organize your bills, it also automates your payments without the risk of an overdraft. Best of all, putting your cushion card on file for your bill payment allows you to build your credit profile just for paying your bills AND your subscriptions!
Recommended article: 4 Best Ways to Build Credit if You Have No Credit History
Frequently Asked Questions (FAQs)
Do minors have credit reports?
In general, credit bureaus don’t generate credit reports for minors. But there are exceptions like those who are authorized users on their parent’s credit card.
Can minors check their credit report?
Yes, just like adults they get a free weekly credit report on AnnualCreditReport.com.
Can teenagers legally have a credit card?
Yes, teenagers who are at least 18 years old can possess a credit card legally. However, they often require a co-signer or must meet specific income criteria to qualify.
Is it possible to have a high credit score as a teenager?
Attaining a high credit score as a teenager can be challenging, but you can establish a strong credit foundation by following proper practices. Over time, your credit score will improve with responsible credit usage.
How long does it take to build good credit?
Building good credit is a gradual process, typically taking several months to a few years. Consistently using credit responsibly is the key.
What’s the minimum age to start building credit?
Once you turn 18, banks and other financial institutions can start sending your credit history to the credit bureaus.
But there are exceptions to this such as authorized credit card users of Bank of America, Barclays Capital, One Citi, Discover, and U.S. Bank.
Will building credit as a teenager affect my future credit score?
Yes, forming responsible credit habits as a teenager can have a positive influence on your credit score in the long term.
Are there any risks involved in building credit as a teenager?
The primary risk involves mishandling credit, potentially leading to debt. However, with responsible usage, these risks can be minimized.
How can parents help their teenagers build credit?
Parents can include their teenagers as authorized users on their credit cards and educate them on responsible financial practices.
What’s the significance of a good credit score?
A good credit score opens doors to improved financial opportunities, including lower loan interest rates and a higher likelihood of rental application approval.
What is the minimum age to apply for a secured credit card as a teenager?
The minimum age varies by issuer, but most require you to be at least 18 or to have a co-signer.
Can I build credit without a credit card?
Yes, it’s possible to establish credit through alternative methods, such as becoming an authorized user or obtaining a small loan.
What should I do if I find errors on my credit report?
If you encounter inaccuracies on your credit report, reach out to the credit bureaus to dispute these errors.
Is it possible to repair bad credit as a teenager?
Yes, with responsible credit utilization and time, you can enhance your credit score, even if you’ve faced some setbacks.
Conclusion
Establishing credit during the teenage years represents an investment in a stable financial future. By adhering to these steps and nurturing responsible financial behaviors, teenagers can position themselves for success. It’s essential to recognize that the path to solid credit begins at a young age and continues throughout one’s lifetime.
