How to help your teenager build credit

As a parent, you could play an important role in helping your teen establish credit and practice responsible financial habits. Good credit can help your teen qualify for a credit card, rent an apartment or get better loan terms.

What you’ll learn:

• You can make lessons about credit more relatable to teenagers by talking about how it helps with things like getting a phone or a place to rent. 

• Having a checking or savings account of their own could help teens practice money management skills.

• Adding your teen as an authorized user on one of your credit card accounts can help them establish and start to build credit.

• Secured credit cards and student credit cards are typically designed for people trying to build and establish credit.

The basics of credit can be pretty simple: You borrow to purchase goods and services right away. And then you pay the money back later, sometimes with interest. But you could build on that by explaining:

• The difference between credit cards and debit cards.

• The concept of creditworthiness and how it’s an essential component of credit applications. 

• The difference between credit reports and credit scores.

• How payment history, credit utilization, credit mix, new credit applications and hard inquiries can impact credit scores.

• How good credit scores can help with getting a credit card of their own, qualifying for a car loan and securing a lower interest rate.

• Ways to establish good credit and the different credit-scoring companies.

You may think your child has no credit history, but it’s worth checking their credit reports. You can request free copies of your teen’s credit reports from AnnualCreditReport.com. If you find accounts that are already in your teen’s name or discover the reports have errors, it could be a sign of identity theft. And that could lead to big headaches once it’s time to open an account.

If that happens, you can contact the three major credit bureaus—Equifax®, Experian® and TransUnion®—to dispute any errors. 

When your teen is 18, consider introducing them to CreditWise from Capital One. With CreditWise, they can access their credit score and credit report anytime for free. They don’t have to be a Capital One cardholder. And using CreditWise won’t hurt their credit scores.

You could also explore opening a checking or savings account for your teen. As the joint owner, you could help monitor and manage the account. But they can have some control and get practice making deposits and withdrawals, balancing their account and using a debit card.

By adding your teen as an authorized user to one of your credit card accounts, you may be able to help them build their own credit even before they turn 18. That’s if:

• Information appears in their credit reports. Capital One reports authorized users’ account activity to credit bureaus. But credit card issuers aren’t required to do so. If your issuer doesn’t, the information can’t appear on credit reports. And if it’s not on a credit report, it can’t help you improve your teen’s credit scores.

• The card is used responsibly. Responsible use could help your teen establish and build their credit history and contribute positively to yours. Negative actions, like missed payments or a high credit utilization ratio, could negatively impact credit scores for you both. 

When you add a teen as an authorized user on your Capital One card, you don’t have to wait for the monthly statement to see what they’re charging. You can track their spending and receive real-time alerts using the Capital One Mobile app. 

And if your teen is older than 18, they can even sign in with their own credentials and view their purchases.

Until your child is 21, federal law says issuers can’t approve them for a credit card unless they can prove they’re able to make the required payments. You may be able to co-sign on the account, but many major issuers don’t offer that option.

But when the time comes, you could show them two types of cards designed for people with limited credit histories.

• A student card is designed for college students with little or no credit history. It might have a lower credit limit than a traditional credit card. And if they’re like Capital One student cards, they’ll have tailored benefits, bonuses and rewards. 

• A secured card is easier to qualify for than a traditional card because it requires a refundable security deposit. Some secured cards, like the Capital One Quicksilver Secured card, may even offer cash back rewards.

According to the Consumer Financial Protection Bureau (CFPB), a credit-builder loan can be “especially beneficial” to those “without a credit score or for those who have no existing debt.”

Here’s how they work. When someone qualifies, the lender typically deposits the loan amount into a savings account. The borrower makes payments on the principal, plus interest. Once the loan is paid off, the funds are released—sometimes with interest.

If your teen is paying some bills but doesn’t have their own credit card, self-reporting could help them build credit. When so-called alternative data is proactively shared with credit bureaus, lenders can use it to judge creditworthiness. Some examples of alternative data can include:

• Rental payments

• Utility payments, such as gas, electric and water

• Cellphone, cable and streaming service payments

• Bank account history, including deposits, withdrawals and transfers

The way you talk about and handle your finances can have a big impact on how your teen will manage theirs. 

You could share financial mistakes you made during your teenage years and what they taught you. While it might not stop them from making their own mistakes, it could prevent them from repeating yours. And your open approach could have the added benefit of making your teen more comfortable coming to you for advice.

Here are answers to a few common questions about how to help your teenager build credit.

Helping your teen establish credit is just the start. Maintaining good credit requires responsible habits, which can take time to develop. But learning early might help them reach many future milestones. And eventually, they may be ready for their own student credit card.