Building credit early on can help establish a credit history for your teenager. It’ll benefit them in the future if they want to apply for a car loan, student loan or credit card. A good credit score can also lead to lower interest rates, which will save them money in the long run, too.
You’re not legally allowed to apply for a credit card till you turn 18. But there are still ways your teen can get a head start on building credit. Here are 7 ways you can help.
How to help your teen improve their credit score
It’s essential your teen understands how their credit score can affect them in the future. And to stress that maintaining it is an ongoing process.
Start by explaining what a credit score is. Show them how to check their credit reports and educate them on credit card benefits.
When you’re sure they’ve understood the basics, you can move on to exploring ways they can start to build credit now.
1. Explain the benefits of a good credit score
Explain that a credit score is a 3-digit number that shows how likely you are to be accepted for credit. Lenders (banks, mortgage providers and credit card issuers) use your credit score to decide if you’re a safe bet to lend money to. A high score means they’re more likely to lend you money. If it’s not so good, you may not get the loan at all. Or you may have to pay higher interest rates.
Your credit score is based on your credit report, which is created using information such as information from the electoral register. This shows where you live and work and whether you’ve ever filed for bankruptcy or been arrested. Your credit report also lists your bill payment history, your loans, and what debt you have.
2. Show them how to check their credit reports
Explain to your teen that checking your credit report regularly is wise. That way, they can see what they need to do to improve it.
It’s also important for teens to ensure the data held is correct and current. Suspicious accounts or activities they don’t recognise could be signs of identity theft.
In the UK, companies called ‘Credit Reference Agencies (CRAs) compile information on how well you manage credit and make your payments, and there are three main ones in the UK - Experian, Equifax and Transunion.
Each CRA holds a file on you (called a credit report or credit file). By law, all CRAs have to provide you with a copy of your credit report for free. It’s often worth getting a copy of your credit report from all three main CRAs if you haven’t applied for it before because they might have different information from different credit providers.
3. Educate your teen on credit card basics
Used wisely, credit cards can be a great tool for establishing a credit history. But they can cause financial problems if they’re not handled with care.
Before your teen begins building credit, make sure they’re armed with credit card facts. Start by teaching them the credit card basics everyone needs to know.
Always make payments on time
Make sure your teenager understands that credit is not free money. It’s borrowing at high-interest rates. Credit card interest rates vary, so to avoid paying interest, it’s vital you make your credit card payments on time, and pay your balance off in full whenever you can.
But there’s also another reason. Your payment history accounts for 35% of your total credit score. It’s based on whether you make payments on time, how many days past the due date you pay your bills, and how often you miss payments. Every time you miss a payment it has a negative impact on your score.
The greater the number of on-time payments, however, the higher your credit score will be. Emphasise to your teen, to avoid paying interest and lowering your score, pay your credit card bill on time every time.
Only use a small amount of your available credit
How much you owe also influences your credit score. This is based on the number and type of accounts you have, the money you owe and the amount of credit you have available to use.
High balances or maxed-out credit cards lower your credit score. Smaller balances, on the other hand, may increase your score, as long as you pay your bill on time.
It’s best to keep your balance to available credit ratio low – to 30% or less. If your credit limit is £1,200, let’s say, keep your balance below £360. Anything above that will reduce your score.
Don’t apply for multiple credit cards at once
Every time you apply for a credit card, the issuer checks your credit report. This can hurt your credit score.
Explain to your teen it’s best to limit the number of credit card applications you make and apply at intervals of six months. You should also only apply if you’re sure your application will be approved.
Don’t have too many credit cards
Having too many credit cards can also impact your credit score. And not in a good way. Even if your cards have zero balances, if there are no payments to see, credit bureaus have nothing to work with.
If you do have more than one credit card, make sure you spend small amounts on it regularly.
4. Lead by example
Children are like sponges. You might think your teen’s not paying attention, but they absorb a lot by watching the way you behave. So lead by example. Model the financial behaviour you want them to copy.
Try showing them your credit card bill. Talk about how you account for this money in your monthly budget. You could also discuss why you picked one credit card over another.
Does yours come with perks like airline miles, travel insurance or a gym membership? Explain the points system and how these rewards work for your teen. That way they’ll be able to make a more informed choice when they’re older.
If you’ve made mistakes in the past, share them. Your teenager will make their own mistakes, for sure, and hopefully, learn from them. But sharing your own stories may make them feel more comfortable coming to you for money advice in the future.
5. Research student and secured cards
If your teenager is 18 or over they can apply for a secured credit card. Secured cards are not very common.
They don't usually require a credit check, but your teen will usually be asked to put down a cash deposit to get one - also known as "security". If you miss payments, the lender will be able to take all or some of the deposit to repay what you owe them.
Generally with secured cards, you won't be able to use any of the deposit while your credit card account is active (you will get it back when you close the account). Your credit limit is determined by the amount of the deposit.
6. Add them to your credit card account
Teens under 18 can be added to an adult’s credit card account as an authorised user, the age for this varies depending on who your credit card account is with.
It’s a great way for them to learn about how to use credit but there are risks. If your child overspends, you’ll be liable for what’s owed and could see your own credit score lowered as a result.
7. Open a bank account
Opening a bank account is a great way to give your teen hands-on banking experience. It’ll provide them with an opportunity to develop good money-management skills. And get them used to using a debit card.
Once you’ve opened a bank account with your child, help them learn to be smart about their spending. Explain the impact of declined debit card charges, why they should track their spend and check their bank statements.
It’ll prepare them to be responsible with their money, especially if they have a credit card later in life.
How GoHenry can help teach your teen about credit
There is an alternative to a bank account for your teen. One that helps them learn about money through their own experience in a safe, secure way.
GoHenry is a pre-paid debit card and app for kids and teens from 6-18 that comes with a companion app for parents.
So while your teenager gets a chance to flex their financial muscles, you get peace of mind. You get notified in real-time every time they make a purchase, set spending limits and flexible parental controls. And because GoHenry is a prepaid teen debit card, there’s no danger of them overspending.
Plus the GoHenry app comes with financial information for parents and kids. The in app Money Missions helps fine tune your teen’s financial literacy, while Parent Space has information on how to talk more to your teens about earning, spending, saving and borrowing.