You’re a teenager, staring down the barrel of adulthood. Maybe you’re excited, or scared, or you feel unprepared, or maybe a combination of all three. Don’t be worried, you have the most powerful weapon in building a financial future – time. And if you’re reading this, it means you care about your financial wellbeing in the future. Even just thinking about it is more than most do. So, if you’re in the “I have no credit” crowd, you’re in the majority. Change that. Get a head start on all of your peers. If you want to build a credit history but don’t know how, Teen Finance Tips is here to help you establish credit for the first time.
How to Build Credit Fast
We live in a fast paced world of instant gratification, so you want to get that perfect credit score overnight right? Well, sorry, we’ll be honest when we tell you that won’t happen. But, by gaining knowledge, staying organized, creating a plan, and sticking to it, you really can establish good credit at a young age quickly and be on your way to the top.
First, you’ll need to have a basic understanding of how credit works. There are several different models, which have varying formulas and calculations, but the general concepts still stand. According to the FICO scoring model, your credit is made up of five things (ordered by importance):
- Payment History – consistency of on time payments
- Credit Utilization – keep the percentage of your available used credit low, don’t max out your cards
- Age of Credit – How long you’ve maintained your credit accounts
- Credit Mix – a variety of different types of accounts, like credit cards, auto loans, home mortgage, etc.
- New Credit – Fresh lines of credit every few years or so
Next, you’ll have to determine what method(s) you’ll be using to build credit. Whether or not you have a steady source of income and your goals – building only credit, or building credit and your savings balance along with it – will be key determining factors in how to find the best way to build credit. We’ll get more into that below, when we explore building credit with vs. without using a credit card.
Lastly, you have to make a budget plan and factor in how much you can afford to pay for your credit building efforts. You’ll regret it if you over do it on your spending and slip up on making payments. You don’t want to start out on the wrong foot with your credit.
How to Build Credit With a Credit Card
If you have a steady income flow, a credit card can be an excellent way to establish your credit quickly. However, it’s crucial that you use it wisely. There are a few different types of credit cards to consider. Take into account your spending habits and weigh the pros and cons of each.
Credit Union or Bank Credit Cards
If you have a good relationship with your bank or credit union and want a credit card that you can use anywhere – at various stores and online, this is the way to go. Beware of your spending. The freedom that comes with this type of credit card can be dangerous.
Retail and Store Credit Cards
If you want a card that you can use only at a certain place, consider a store specific credit card. The benefits of this are that it limits you and helps avoid unnecessary spending temptations. However, you may want to avoid getting one of these cards at your favorite clothing store, video game shop, etc. Grocery stores are typically a decent option.
Secured Credit Cards
A secured credit card is a great low risk credit option for first time credit builders. With this type of card, you make a deposit upfront, which then becomes your credit limit. By having this boundary and not falling into the unhealthy credit habit of “I’ll worry about the payment later”, this can be a good way to start building history and aging your credit.
How to Build Credit Without a Credit Card
If you have the income, but would rather avoid the credit card you can consider taking out a credit builder loan. In this type of loan, you pay the loan upfront first. Then the bank or credit union you are using would deposit this into a savings account. You’ll make monthly payments, with interest charges just like a normal loan for the full loan term. These loans can vary, usually having loan terms anywhere from six to twenty-four months. Making these on time payments will help boost your credit score. At the end of the loan you’ll receive all of the money, occasionally with interest gains, and an improved credit score.
But what if you don’t have the consistent income to support opening a credit card, or the lump sum of cash needed to start a credit builder loan? If you have someone who would be willing to add you as an authorized user on one of their lines of credit, you can still establish yours. As an authorized user, you’ll get your own card with your name on it, that has all of the same privileges as the primary cardholder. You are not legally accountable for the charges and payments however. This all sounds wonderful, but you have to be careful. Be sure that whoever is signing you on as an authorized user understands the process fully and set guidelines with them regarding how much you will spend, as well as how and when you will be repaying them. Miscommunication and poor choices can easily lead to conflict and damage to your personal relationships.
Ready to Build Your Credit?
As fragile of a process as it may be, establishing credit and building up a history is not all that difficult. Learn about credit, determine the best credit building technique for you, and make a budget. Then you’re ready to put your plan into action and secure a comfortable financial future. If you jump on credit building at a young age, you can make many big purchases down the road so much easier.