How to help your teenager build credit

As a parent, you always want to make sure your kids are on the path to a bright future—at school, at work, at home…everywhere. Financial literacy, particularly when it comes to how to build credit, can be a big part of that discussion. 

Good credit scores can give young adults access to loans with better rates, more favorable terms and more credit options. Good credit could even help them when it comes time for them to apply for a job, an apartment or a cellphone plan.

Learn more about how to help your teen establish credit and practice responsible financial habits.

What you’ll learn:

• Teaching your teenager about financial literacy and how credit works could help them understand what it means to build credit.

• You can make lessons about credit more relatable to them 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.

• When you think they’re ready, you could add your teen as an authorized user on one of your credit card accounts. Eventually, they might apply for a secured or student credit card of their own.

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.

• The ways payment history, credit utilization, credit mix, new credit applications and hard credit checks can all impact credit scores.

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

• The ways to establish good credit, and the different credit-scoring companies.

You can help your teen start by checking their credit reports. If you discover the reports have errors or if you find accounts that are already in your teen’s name, 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. According to Experian, people can check for themselves once they turn 14.

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. CreditWise is free whether your teen is a Capital One cardholder or not. And using CreditWise won’t hurt their credit or their credit scores.

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:

• 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. 

• 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.

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 own purchases.

What’s a credit-builder loan? Think of it as a starter loan designed to help you build credit. According to the Consumer Financial Protection Bureau, 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—for example, your teen—qualifies, the lender deposits the loan amount into a savings account. Your teen will be expected to make monthly payments on the principal, plus interest. Once the loan is paid off, the funds are released. You can check with lenders about fees and whether accounts earn interest.

Whether it’s by making regular payments on a credit-builder loan or learning the basics of credit as an authorized user of your credit card account, learning how to make consistent, on-time payments could go a long way toward helping them build good financial habits they can carry with them. Plus, it’s a good way to help them build credit of their own right away.  

You could also explain how missed payments may lower credit scores.

Some people keep their spending money in a checking account and their short-term savings in a savings account. Demonstrating how to use and manage both accounts might teach your teen skills they could apply when they get their own credit card or auto loan.

If you think they’re ready, you could explore opening a checking or savings account for your teen. As the joint owner, you could help monitor and manage the account. But you can make sure they’re able to have some control and get practice as well.

When applying for a credit card, lots of young people can feel stymied, because it can be a challenge to get approved without credit history. But it can be difficult to establish credit history without a credit card. 

One increasingly common workaround is self-reporting credit. What’s self-reporting credit? It’s when credit consumers arrange to share alternative data with credit bureaus proactively, to help them assess creditworthiness. When this data gets reported to the credit bureaus, it can help boost credit scores and build credit history. Some examples of this 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

When that information shows up in credit reports, it can help demonstrate creditworthiness. 

Finally, it’s important to remember that your teens are listening. And what they hear from you can have a big impact on how they think about—and handle—their finances. If you’re on the phone talking about financial matters, make a point to explain to them what you’re doing. 

You could also 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.

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.