As a teen, building your credit is something you might not have spent much time on, but many of us don’t —until we need it. As time goes on, credit will be something you’ll need to take some big steps forward in life.

What is credit and why do you need it?

Credit is like a short-term loan. It’s borrowed money that you agree to pay back. Credit card interest is the fee you’re charged for borrowing money from the lender. Your credit score is like your grade point average (GPA), it’s an indicator of how well you’ve paid things back in the past. It’s largely based on your payment history.

A good credit score will save you tons of money, especially when it comes to buying a car, a house, or other major purchases. Without good credit, the amount of loan you are likely to be given will be small or you’ll end up paying a high interest rate.

The interest fee will be added to your balance if you do not pay off all your credit debt at the end of each billing period. Credit card issuers will give you a credit limit so you don't spend more than you can afford to pay back.

Start building your credit

Become an authorized credit card user

One way to start building credit is to become an authorized credit card user on someone’s account. Some companies say that being an authorized user doesn’t affect your credit score but the truth is, it can. As an authorized user, usually with a parent/guardian or spouse, your credit score will improve as the credit card is paid back on time.

Get a “training” card

Some credit cards are easy to get. They start you with low limits but when you pay them back on time, they can be effective tools for showing your creditworthiness. Gas cards, student cards, and department store cards are good beginner credit cards. When you pay them off at the end of each month, you show that you are creditworthy and your credit score will improve.

Tips for New Credit Cardholders:

Here are some quick but important tips for new credit cardholders:

Pay off your credit card balance each month so you can avoid interest

Avoid carrying over a balance as much as possible

Watch your credit score on a free credit monitoring site

Ask for a higher credit limit after you’ve shown you can pay on-time

Only spend up to 29% of your available credit

Become a renter

Your rental payment history can have a positive or negative impact on your credit score. Many property management companies report rental payments to credit-rating bureaus. So your payment history will affect your credit score.

If your landlord does not report rental payments to the credit bureaus, you can ask them to report your payment history, learn more here.

Get a secured credit card

A secured credit card is one in which you pay a deposit to the credit card issuer to open your account. The amount you deposit, “secures” the account. The line of credit you receive on your credit card is equal to the amount you put down as a deposit. For example, a $500 deposit will get you a card with a $500 line of credit.

Apply for a credit builder loan

Credit-builder loans are designed to help those who have no credit, have poor credit, or are trying to improve their credit history. They are almost like savings accounts but you make payments for a specified amount of time. When you make payments toward this “loan”, the lender will report your payments to the credit bureaus.

Once your repayment term is up or you complete the minimum number of payments, you “unlock” some or all of the loan and receive access to the funds.

Maintaining a Good Credit Score

Pay your credit cards and loans on-time
Your payment history is a major part of how your credit score is calculated. According to Debt.org, it’s around 35% of your credit score. So, you must make a payment toward your balance every month. If you’re not able to pay the full balance, pay the minimum to keep a positive payment history.

Credit card usage ratings*

Needs work: >50%

Fair: 30-49%

Good: 10-29%

Excellent: 0-9%

*According to Credit Karma

Keep your credit card balance low

Credit rating agencies look at how much of your credit allowance you're using. This is known as your Credit Card Utilization rate —how much you owe to your creditors compared to how much spending ability you have. Ideally, they like to see a balance that is less than 30% of your available credit.

Keep accounts open as long as possible

The length of your credit history impacts your credit score. The longer you have a credit account open, the more favorably it impacts your credit score. If you want to pair down credit cards, try keeping the oldest credit accounts open.

Keep a mix of credit cards and loans

Credit agencies look at the mix between credit cards, mortgages, and auto loans. While a good mix of credit products is good, it doesn’t make a considerable difference in your score.

Avoid opening new accounts
New credit accounts can count against your credit score so, definitely avoid opening a lot of credit accounts in a short time. Also, too many credit inquiries can hurt your credit score, so you’ll want to avoid applying to too many different banks for a loan.

Keep in mind that your credit score is like your reputation, it takes time to build! Make payments every month and be patient. Things will fall into order with time.

For more advice on this topic, please see the links below.

Sources

6 Best Credit Builder Loans

13 Tips to Increase Your Credit Score

Credit Card Authorized User: What You Need To Know

Credit cards - Consumer Financial Protection Bureau

How Do Credit-Builder Loans Work?

How long does it take to build credit

How to Build Credit

How to Increase Your Credit Score

What Is The Average Credit Card Interest Rate?

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