TEEN BANKING

The Complete Guide to Building Credit for Teens

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In this article, you will learn what a credit score is, how to get a good one, and where to find yours. You’ll also earn a good understanding of a Fair Isaac Corporation (FICO) score, and the three major credit bureaus. Better yet, you will learn what you can do today to start building a credit score as a teen.

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Key Learnings

  • Achieving and maintaining a healthy credit score is essential to obtaining offers from lenders.
  • The FICO scoring system is a key driver for lenders determining whether or not you are a good candidate to lend to.
  • Your credit score is compiled of five important factors: payment history, amounts owed, length of credit history, credit mix, and new credit.
  • Did your credit score go down? Not to worry! You can increase your credit score by always paying your bills in full and on-time. Your credit score will be back up in no time!
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Credit Score Basics

What is a credit score?

A credit score is a number that represents the risk a borrower poses to a lender. In other words, how likely that borrower is to repay a loan or credit card on time. In general, credit scores range from 300 to 850, with higher scores earning borrowers greater approval odds and more competitive rates.

Why care about your credit score?

There are many reasons to pay attention to your credit score, and start building good credit, even as a teenager. Perhaps the most important reason is that you will qualify for more credit and receive better interest rates. That may sound boring, but a lower interest rate means you will pay less for the most expensive things you’ll ever buy. If you want to pay less for vehicles, or for a home someday, building good credit is very important!

Earning a credit score is like receiving grades in school. The higher grades you get, the more opportunities you will have in life. Good grades help you get into a better college. Your parents may even reward you for those A's and B's. The same is true for your credit score. More doors will open if you achieve a higher credit score. 

Having a high credit score may even help you land a better job. You might know that many employers will do a background check before hiring someone, but did you know that some employers will also request a credit report on their applicants? A credit report that shows consistent on time payments and responsible use of credit may give you the edge over someone with a history of late payments and large amounts of debt (especially if you want a job in finance).

What does FICO stand for? 

FICO stands for Fair Isaac Corporation (FICO). This company uses an algorithm to calculate a score based on information provided from credit bureaus in your credit report. FICO scores are used by top lenders to decide if you are a good candidate to lend to.

What is a FICO Score?

The FICO credit score is the score that helps the lender assess how likely you are to pay back the money you borrowed.

A FICO credit score uses information provided by one or more of the three major credit bureaus — Equifax, Experian, and TransUnion. Your FICO score can differ depending on which credit bureau is providing the data. For example, your FICO score from Equifax may be higher than your FICO score from Experian. This is because not all lenders and creditors report information to all three credit bureaus.

Lenders may use one or blend all three to decide on whether to lend money, and what interest rate to charge. The credit bureau they use may depend on the type of purchase and payment program the lenders are using. The credit score you have when you purchase a car may be different from the credit score you use to pay rent on an apartment.

In addition to FICO credit scores there are other scores that use their own algorithms to calculate your credit score. But the majority of top lenders will request and use your FICO score to inform their lending decision.

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How do credit scores work?

You can’t have a credit score without first having a credit history. You build this credit history by doing things like paying bills, opening a credit card, or getting a loan. Each of those actions is associated with a company like lenders, banks, credit card issuers, and collections agencies, who all collect and share your credit history with credit bureaus. In the eyes of the credit bureaus these companies are called data furnishers, and they’re the ones who supply the data that credit bureaus use to build your credit report.

Your credit report includes information that falls into four categories:

  • Personal Information (name, addresses, date of birth, social security number)
  • Credit Accounts (type of account, credit limits and balances, payment history, date of opening and closing)
  • Credit Inquiries (lenders and companies who have requested your credit report)
  • Public Records and Collections (bankruptcies and debt that is overdue and has been sent to a debt collections agency)

FICO plugs your credit report into their algorithm to produce your FICO credit score. Since this score takes your full credit history into account, it’s a great indicator to lenders and other companies on how risky it may be to do business with you.

With good credit (670-739) to excellent credit (800 and up) you will have an easier time being approved by lenders. You will also have lower interest rates, which means paying back less money over time. It’s best to start working on your credit score at an early age, so you can have more opportunities to show that you’re responsible with your money and be approved by lenders when you’re ready to buy your dream car. You can get started with Copper and create a goal to start saving now for that dream car.

Credit Score Range
FICO
Excellent
800 - 850
Very Good
740 - 799
Good
670 - 739
Fair
580 - 739
Poor
< 580
Calculations

How are credit scores calculated?

FICO calculates your credit score based on the information in your credit report. Not all of the information is used to calculate your score, like your personal information. Other information, like your credit accounts, make up the majority of your FICO score. The information that is used is grouped into five categories that are weighted differently to calculate your score. Your goal in building a high credit score is to keep all of these categories in mind:

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Payment history (35% of your credit score)
Payment History is the most influential aspect in calculating your credit score. Lenders will look into any late payments, and consistently late payments will lower your credit score. It is very important to create the habit of paying bills on time. Starting this habit now will raise your credit at an early age and help you maintain a life-long high credit score.

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Amounts Owed (30% of your credit score)
Lenders will look at how much debt you have. They calculate how much money you owe and divide it by how much credit you have available. This is called a credit utilization rate. You are starting on the road to build credit and you may not have a lot of debt. This is excellent! This means you will have a lower credit utilization rate than someone who is paying off a car or student loans.

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Length of your credit history (15% of your credit score)
The longer you have a credit account the better. It’s important to keep all accounts up-to-date regardless of how old they are. Lenders want to see consistent on-time payments from your past and present. Unfortunately, you are just starting out. That’s why it is important to start a credit account early in life. When you start early this factor will really make a difference in boosting your credit score.

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Credit Mix (10% of your credit score)
Credit Mix is when you create many different forms of credit. A student may get a car loan, then they decide to take out student loans for college. These are two different credit accounts. This is an example of credit mix. Having different accounts to diversify your credit will raise your credit score.

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New Credit (10% of your credit score)
Every time you open a new credit account, lenders check your credit score. Opening too many accounts too quickly will lower your credit. Lenders see this as a red flag. They will flag this as risky behavior and assume you will not be able to pay back what you owe. In the beginning of building your credit, you will have to open new accounts. Make sure that these new accounts are spread out over time or this can negatively affect your credit score.

Trying to convince Mom and Dad to let you have a credit card? If they're not sold start smaller! You can open a bank account and debit card with Copper in a few minutes with your parent's help. Copper helps you form smart money habits, and prove to Mom and Dad (and eventually lenders!) that you can be responsible with your finances.

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Does checking my credit score affect my credit?

If you get your own score through your bank or a free credit score service, it does not affect your score. That's because checking your own score is considered a soft pull on your credit. You can check it as many times as you want with no impact to your score.

If you’re applying for credit from a lender this is considered a hard pull credit check and that will drop your credit score a few points each time. For example, when buying a car, the lenders check your credit score. This would be considered a hard pull and drop your score a few points. Just like when opening new accounts, you’ll want to make sure each hard pull credit check is spaced out over a short amount of time.

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Where can I check my credit score?

There are many free websites that offer your generic credit score like CreditKarma and Credit Sesame. Many banks and credit unions also offer free services to monitor your credit score. If you want to check your FICO credit score (the one that lenders typically check!) you can check through Experian, some Equifax products, and MyFICO.

You can request a copy of your credit report from each of the three credit bureaus (Equifax, Experian, and TransUnion) for free through AnnualCreditReport.com. Reviewing your credit report is a great way to find areas where you can improve your credit habits and increase your credit score.

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What can I do to raise my credit score?

The first thing you can do is get a job and open a checking and savings account. Copper offers both and is super easy to join. Just download our app, fill out some personal info, get your parents to do the same, and hit ‘Submit’. In a matter of minutes, voila! You’ve got a bank account.

Now that they know you’re serious about your finances, ask your parents about being added as an authorized user on one of their credit cards. Next, get in the habit of making full and on-time payments. Check your credit report regularly and dispute any errors or fraud. Ensure all of your accounts are open and in good standing.

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Let’s wrap up your learning

Picture your dream life. Red Lambo in the driveway of your mansion on the beach…. You now have what it takes to get there. You will have more opportunities in life with an excellent credit score. You’ll save more money long-term by having lower interest rates. You will be a more desirable candidate for your dream job based on your credit score.

If you are ready to start working towards your dream life, start with the first step: build up your credit score.

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Now that you've learned how to build credit, check out these other guides and become a financial rockstar by the time you're 18.

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