What Your Teen Needs To Know About Credit Before Their First Card!

Having a good credit score could be very important, if not crucial, to have as you become an adult. Buying a car? A house? Renting an apartment?  Your credit score might have a direct effect on how those purchases play out.

Although most of these events happen a little later in your life, the choices you make and the habits you create as a teen/ young adult have a direct impact on your future with credit. The earlier a teen understands what credit is, how it works, and how to improve their own, the greater their chances are to stay out of trouble with credit and debt in the future. We put together an easy-to-understand credit overview for you to share with your teen. 

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Basics of a credit score that a teen needs to know: 

A credit score is a three-digit number a person earns ranging from 300–850 which, in short, represents how well you have managed your money in the past and assigns a number to represent your credit risk and the likelihood you will pay your bills on time. The higher the score, the more likely you can pay off credit, and the more attractive you become to lenders which in turn, gives you more and BETTER options when looking at topics like credit cards,  car insurance, and so much more. 

Generally, a score of 700 or above in the FICO® model is considered a good credit score in most lenders' eyes. Your credit score numbers are broken down into the following categories:

• Exceptional: 800 and above
• Very Good: 740 to 799
• Good: 670 to 739
• Poor: 579 and below

Credit scores are compiled into five main categories listed below. These categories all have a different percentage or weight on your score:

1. Payment history (35%): A gage of how long you have handled credit accounts in the past. Basically, have you been getting bills for a long time, AND have you paid them. 

2. Credit utilization (30%): This shows how much credit you currently have. If someone is financially overextended (or have a lot of credit outstanding), they are more likely to make late payments or miss a payment altogether. 

3. Credit history (15%): How long have you been utilizing the credit system? Lenders want to know that you've been in the game awhile and know what you are doing. 

4. Credit mix (10%): Do you just have a bunch of credit cards? Do you have a mortgage loan and a credit card? This considers all of the different types of credit that have 

5. New credit Inquiries(10%): Even though this only makes up only 10 percent of your score, authorizing new credit inquiries in a short period of time can have a large, negative impact on your credit score. 

Once your teen understands the basics of a credit score, share with them the following tips and tricks of how to get a good credit score and keep it that way! 

The earlier you open an account the better:

Your credit score takes into account the length of time you’ve had credit available to you. In theory, opening up an account as a teen could only benefit your credit score - if you are smart about your spending. Try to find a credit card without any annual fees for your first account, so that you do not feel compelled to close it out in the future. Another option is for the teens to become an authorized user on their parent’s credit card account that they have had for a while. As long as the parent has had excellent payment records this could positively jump-start the teen’s credit score.

Don’t apply for every card they offer you: 

We have all been there, you are checking out at your favorite clothing store when they ask you if you would like to open a store card to receive a discount. Although it may be tempting, make sure it’s been enough time since the last time you've applied for a new credit card. Each application for a new card causes a hard inquiry on your credit and may take a few points off your score.

Pay your bills on time: 

Paying bills late by 30 days or more can bring down your credit score. Every day past 30 days, the greater the impact on your score. You can always set up autopay or a calendar reminder on your phone so you don't miss due dates. If your due dates are not lining up with your paydays don’t be afraid to call your credit card provider and ask to move your payment due dates so they better align with your paydays. More often than not, your provider will be happy to help you with this request, just don’t try to do it every month. 

Just because you have a big credit limit doesn’t mean you should use it all:

When you are approved for a credit card they give you the max amount of money you can spend on that card. The amount is often more than you could and really should spend. Experts recommend using 30% or less of your available credit in order to keep your credit score in a good spot. To keep your credit utilization low, you can try things like setting balance alerts or making extra payments during the month. 

If you do find that your credit score took a hit from the amount that’s on there the good news is that this can be easily reversed. Just pay a high credit balance down and you should see a credit increase pretty quickly. 

Now that your teen has the basic knowledge of credit and you have the tools to mold their credit habits, it’s time to start them on their credit journey. 

Encourage your teen to check out the Money Moves that we have on credit score as well.