Does Your Teen Know How Credit Scores Work? What to Teach Your Teen About Building Credit

Last updated on August 10th, 2023 at 05:40 pm

Ready to have that all-important talk with your teen? You know–the one about managing their money and building credit?

Your teen will always be your baby, but on the other hand, we all know they grow up fast. It’s only a matter of time before they’ll be on their way to adulthood and leaving home to start a new job, move in with friends, or attend school. 

Before that day comes, you need to make sure they’re prepared for the realities of becoming an adult, and that includes something that doesn’t get enough attention — borrowing money and building credit. 

As a starting point, ask your teen, “what affects your credit score?” and see what they say. While they might know that credit cards and loans have an impact on this score, they probably don’t know exactly how it all works or what they can do to build and maintain a good score.

And, let’s face it,  you might not feel like an expert either! But don’t worry, we’re going to get into what goes into that mysterious number called a credit score, and what makes it go up — or down. Then, you and your teen can both feel more confident in managing your finances. 

1. Paying on Time is Crucial

If you want to build your credit, start by paying your bills on time. Lenders and creditors will see this as an important indicator that you can handle your financial responsibilities. Making on-time payments plays a major role in determining your credit score.

2. A Variety of Credit Accounts Helps

There are various types of credit accounts, and each of them can impact your credit score in a different way. Having a good mix of credit cards, personal loans, and lines of credit is generally a smart idea. There’s just one catch. Variety only looks good if you pay your bills on time, as it shows you can handle multiple payments at once.

On the flip side, having too many accounts in poor standing will hurt your score.

3. Be Cautious with New Credit Accounts

Credit scoring models consider how many new accounts you have and how many you’ve recently applied for or opened. Opening multiple accounts in a short period of time can be risky, as it suggests you’ve increased the amount of bills you’ll have to pay.

This is a move that could make lenders see you as a high-risk borrower–at least until you prove that you can juggle these accounts and maintain a positive payment history. 

4. Age Matters When it Comes to Credit Accounts

Creditors like to see that you’ve been managing your credit responsibly over time. Having a long credit history with no red flags (like missed payments) may boost your credit score. Unfortunately, your teenager won’t be able to rely on this part of the calculation, since most lenders require teens to be 18 years of age before they can borrow money on their own. 

You might be able to help them build a good credit score earlier though by making them an authorized user on one of your credit cards. 

5. Keep Your Balances in Check

Creditors prefer to see that you’re using only a small portion of the credit available to you. If you’re close to maxing out your credit cards, it can negatively affect your score. Keeping your credit card balances high tells prospective lenders that you’re probably carrying too much debt.

6. Watch out for Negative Marks

Certain things — judgments, liens, foreclosures, bankruptcies, or delinquencies — have the most detrimental impact on your credit score.

If you’ve faced financial difficulties and had to go through one of these situations, it may impact your credit score for several years. Having accounts sent to collections or sold to debt buyers may also negatively influence your credit score. 

And there you have it — now you’re prepared (or at least better prepared) to talk to your teen about how to build a good credit score and what to watch out for. Sharing this information can help them make better borrowing choices so that they can start their financial futures off on the right foot. 

Also read:
Teaching Kids About Money — 7 Smart Tips
How to Pay Off a Car Loan Faster + The Pros and Cons
Get Your Truly FREE Credit Report and Credit Score Online

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