How Do Teenagers Build Credit?
3 mins read

How Do Teenagers Build Credit?

Establishing a good credit history early is as important as not creating a bad credit history. Start teaching teens about money, budgeting and the importance of credit at an early age. Give them some freedom with money to teach them about personal responsibility. Be open to discussing your own credit history and mistakes with teens. Continue to set a good example with your own limited credit card use, reliance on debit cards or cash, and maintaining a budget.

Step 1

Money by Lusi/Sxc.hu

Open a passbook savings account at a local bank for the teen. If possible, start the savings account when the child is a preteen or younger. Encourage your teen to deposit half of all earned money and monetary gifts into the account to grow the balance and establish a positive relationship with the bank. It also reduces the temptation to spend money, according to FDIC Consumer Affairs Specialist Sachie Tanaka.

Step 2

Check; Photo by Moketni/Sxc.hu

Visit the bank where the savings account is held to help the teen start a checking account. Opt for a no-minimum no-fee checking account. Transfer money from the savings account to the checking account, or deposit the teen’s allowance into the account. Teens with steady jobs or regular income from allowances are the best candidates for a checking account. You may need to open a joint checking account with your teen at some banks.

Step 3

Debit card; Photo by Woodsy/Sxc.hu

Teach the teen how to use a check register, how to subtract ATM fees and how to balance the check book each month. When the teen is comfortable with the checking account, encourage the teen to request a debit card from the bank. Some credit card companies are offering prepaid debit cards for teens and their parents, which can help teens build a relationship with the credit card companies.

Step 4

Teen and cell phone; Photo by Smitea/Sxc.hu

Allow teens with regular income to open their own cell phone account. When the account is opened the cell phone company will report the open account to the credit bureaus. Paying the cell phone bill on time can help establish a credit history.

Step 5

Co-sign a small personal or auto loan for a teenager with a steady job. Teens may need the money to buy a used car or to travel abroad for a school trip. Ensure that the teen pays back the loan installments in a timely manner. A small loan that is paid on time and in full will establish an early and positive credit history for the teen.

Step 6

Apply as the co-signer a for a low-maximum, low-interest credit card for a financially responsible teenager. Explain how interest rates increase the cost of the goods or services purchased when the balance is not paid off monthly. Keep a close eye on the credit card, and remind the teen to pay the bill on time.

Warnings

  • Not all banks will open a checking account for teens under 18.
  • Do not give a teen your credit card to use on a regular basis.
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