When a lender takes a look at your credit score, they consider many things. Unfortunately, you don’t get a break because you’re a teenager. Actually, this can make credit-dependent events, such as financing a car or home even more difficult. You’re not going to have a perfect credit score as a teen, but you have the power to start on the right foot with your credit and build up a decent credit score fast! That’s where Teen Finance Tips comes in – we’re here to help!
What is Credit Used for Anyways?
If you want a straightforward definition of “credit”, it’s a measure and record of one’s ability to be trusted to pay back the value of goods or services received in advance — your reliability and reputation as a borrower. Credit is used for all sorts of things – basically anything you are applying for, like a credit card or personal loan, or are financing, like a home or a car.
Without a decent credit score, larger purchases and life events can be extremely challenging. This may not seem like so much of a big deal now, but later in life it can make a tremendous difference – think of future you! Face it, in this day and age, you kind of need credit if you want to live a comfortable, “normal” life. Not many people have a couple hundred thousand dollars in their piggy bank to buy a house in cash. They have to finance these purchases over several years.
Let’s take a look at credit score ranges. These do vary a bit based on the credit bureau you are going by, but here are FICO’s latest score ranges – the score that most lenders will consider when determining your risk as a borrower.
|Exceptional||800 – 850|
|Very Good||740 – 799|
|Good||670 – 739|
|Fair||580 – 669|
|Poor||300 – 579|
Keep in mind, this is only the published FICO score ranges. Many other models exist. Some call scores below 500 “very bad credit”, or even “miserable credit”. Generally speaking however, these ranges are reliable to use.
If you have anywhere from “Good” to “Exceptional” credit as a teenager, that’s great! You should have no problem applying for a new credit card, or maybe getting a car loan as a first time buyer. Just be realistic. It may not be the $10,000 credit limit or the newest, coolest car, but it’s a step in the right direction and another tool to enhance your credit further. You’ll of course have to discuss these things with a lender, which may lead to needing a cosigner or down payment. The best advice we can give is to go at your own pace. Don’t rush into anything you’re not comfortable with or financially prepared for.
Focus on the 5 Ingredients to Your Credit Score
When you’re faced with challenging or sensitive situations, sometimes you just have to work with what you’ve got. If you look at the factors that determine your credit score and focus on the ones that you can currently control, the rest will fall into place in no time. The five elements considered in determining a credit score (in order of importance) are payment history, credit utilization, age of credit, credit mix, and new credit. A couple of these items are, obviously, kind of difficult for a teen to accomplish. If you haven’t yet, make sure you pull a credit report and it will give you a lot of the information we outline below for the 5 ingredients.
What you can do:
- Payment history: make sure you make every payment on time. Set reminders, alerts, whatever you have to do. Just don’t be late! You can tank your credit just as fast (if not faster) than you can build it.
- Credit Utilization: Don’t go crazy and max out your card right out of the gate. One very successful and common way to establish credit is to open a credit account and use it only for small purchases. Pay them off in full and start creating that payment history we talked about. If you consistently use the majority of your available credit, that can lead down a bad path of debt, fees and interest, and bad credit problems.
- New Credit: This one you’re going to have to keep up with over the years and try to add in fresh credit accounts every so often. The good news for right now – any credit is new credit when you’re just starting out!
What you might struggle with:
- Age of Credit: This one is pretty self explanatory. The only solution is to be patient. Lenders like to see that you’ve maintained a good standing with your accounts over time.
- Credit Mix: No one without an established credit history is going to be able to open all sorts of accounts all at once (nor would we recommend that). Eventually you’ll want to have a variety of credit account types – home loan, auto loans, credit cards, etc. For right now, the best advice we can give is to start small and within reason based on your budget.
Planning and Monitoring are the Keys to Credit Success
A lot of the tips and advice you’ll read seem like common sense, right? “Don’t overspend”, “Stay within your budget”, the list goes on. Sure, they all seem like no-brainers but when you have a couple thousand dollars in available credit it’s easy to find a million reasons to justify that purchase you probably don’t really need. Even the most successful and wealthy people have had, and still have those temptations – and that’s okay! Every once in a while that’s fine, treat yourself. You deserve it. As for the other times, and as a general rule of thumb, it’s important to get yourself into good habits and critical thinking about your purchases and your budget.
Make a plan, try to stick to it, and adapt. Everything is constantly changing, especially in your teens into early adulthood. You’re financial plan at 16 won’t match the one you have at 21. If it does, you’re doing something wrong!