Introduction
In the United States, teenagers cannot start building credit until they are 18 years old. This is because until that point there is no record of their credit. However, at the moment they turn 18, it is important to teach them the correct ways to respect and take care of their credit. This will insure that by the time they are ready to move to bigger purchases, such as a house or a car, they will have the necessary credit to do so. It will also insure that they will have developed healthy financial habits for the rest of their lives.
Preparing
Parents can use teen debit cards that allow their kids to use the card like a credit card. The use of these cards will teach children financial responsibility while giving them control over their spending. These cards work more like pre-paid debit cards than a credit cards. The parents can put a specified amount of money on the card, and the teenager will be unable to use more than what is available. This protects the parent from overdraft fees, and teaches the child how to properly keep track of, budget for and use a credit card.
Parents can also open up a savings account at their bank in the name of their teenager. This will teach them how to save money instead of spend it.
First Credit Card
Since teenagers do not have a credit history yet, when they turn 18 their options will be limited. However, there are plenty of banks and credit card companies that offer student credit cards. When looking at these offers, a teenager should pay close attention to the interest rates. Many credit card companies know that most teenagers are too excited about getting a card to even care about the interest rates involved, and so many banks hike up interest rates for teens.
Number of Accounts
Teenagers should watch how many credit accounts they open. They may be temped to open as many accounts as they can, but that can actually lower their credit scores. A smart option is to apply for a checking account to start building a history with their bank. This will allow them to apply for a student credit card directly through the bank itself. Bank credit cards have advantages over most other credit card companies when it comes to use and interest rates. At most, all a teenager needs to start their credit history is a bank credit card (or low interest rate credit card from another source) and one merchant credit card or gas card.
Loans
Student loans is another great way to add a history to your credit. Regardless of whether you are paying on your loans, or if they are in deferment, a school loan will quickly build up your credit. If you are not planning on attending college, you may also be able to apply for a small loan through your bank. You will be able to do so after you have built a history with them through your savings and checking accounts. Take out a small enough loan that you can pay it back quickly and easily. Do not take out a loan if you cannot afford payments. Having no loan on your credit is better than having late payments for a loan you couldn't afford in the first place.
Paying on Time
The key to a good credit score, even as a teenager, is paying your bills on time. Even being 15 days late on a payment can make a nasty dent in your credit history. Pay your bills early each month, and if possible pay your balance off each month as well. Never carry more than you can afford on your credit card.
Low Debt
Another key to building credit as a teenager is keeping your balances low. Just because your bank gave you a credit limit of $500 does not mean you need to go and spend that $500. Keep your balance below 25 percent of your limit. If you do this, you should be able to pay your balance off each month, as well as start a stellar credit history.
Learn to Live Within Your Means
The habits that you learn as a teenager will carry with you into adulthood. This is why it's important to live within your means. What this means is not spending more than you can afford to. Many people get old enough to qualify for credit, and use that credit to live the high life. These same people often forget that with credit, you do have to pay everything back eventually. The worst thing you could do as a teenager is prepare yourself for a bankruptcy later. Keep in mind that you only have a limited amount of money. Save, plan and spend your money wisely, and you will have a great credit history for life.
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