Building a high credit score is essential for financial freedom. The earlier you start to build credit the higher the likelihood that your score will rise through time. Building credit as a teenager can also help qualify you for more affordable student loans and other lines of credit that you may need access to in the future.
There are a few ways you can build credit as a teenager:
If you live in the same home as your parents, chances are they pay monthly for their basic utility bills (water, gas, electricity, etc.). You can have multiple people listed on a specific utility account. Getting your parents to sign you on their utility bill is a great way to build credit. If the payments are made monthly, you can easily increase your payment history, which is the largest single factor in determining your credit score. You usually can do this through an online payment portal or by calling your utility provider.
Student Credit Cards
Student cards are specifically designed for younger users to learn how to properly utilize their line of credit. Companies such as Discover, Chase, and Bank of America offer credit cards that are specifically tailored to young college students.
Typically, you need to be over the age of 18 to apply for a card. These cards may carry a low credit limit (amount of credit available to spend), but they can help boost your credit so you can apply for credit cards with larger spending limits. Companies that offer these cards tend to make them available to students who may have little or no credit history.
Authorized Users on Credit Cards
You can add people as “authorized users” on any one of your credit card accounts. This usually involves filling out an online form or placing a call to your credit provider. Typically, the credit card provider will send you another credit card with the child’s name on the card.
The charges accumulated on the second card will appear on the same bill, there is no billing separation with this arrangement. The main account holder will also be obligated to pay for the recorded expenses on the secondary card. An authorized user has no power to increase your credit limit and you can typically view their spending through your cards online billing portal.
This type of credit card is a great option if you are just starting out in the world of credit and credit cards. Usually, companies will issue these cards with low limits and they are typically backed by a matching deposit (that’s why they are called SECURED cards). As an example, if you received a $300 secured line of credit, you will most likely have to deposit $300 into that bank or credit account to ensure repayment.
This is also a great step if you are working on increasing your financial limits. Be sure to read all the fine print and ask your banker/credit provider as many questions as you can. Many of these cards carry an annual fee and can have heavy penalties for late payments and overuse.
All in all, building credit as a teenager can seem like a daunting task. However, you will have a significant advantage financially by starting to build your credit while you are younger. Before building credit with your parents, be sure that they have a healthy credit score. For example, if your parents add you as an “Authorized User” on their credit cards, you may have to pay higher interest rates if your parents have a poor credit history or score.