By Min Zhen Chen
Did you know that more than 45 million American consumers have no credit or credit score!? Of those 45 million American consumers, more than 80% of those consumers are between the years of 18 and 19 (CNBC 2015).
So what is a credit score and why is it important? Your credit report, a record of your credit transactions, is used to create a credit score, which is a numerical expression of your creditworthiness. Your credit score helps lenders, landlords, etc. determine how likely you are to make payments on time. This directly affects things such the amount of money they will loan you, the interest rate you’ll receive, or whether or not you can lease a car or apartment. Companies can also ask to check your credit score as part of a job application!
Statistics show that most teens were in the category of consumers without credit scores. This is mainly because they had not yet established their credit history as the main source for your credit score comes from paying for credit cards or making bill payments. This becomes a problem for teens that are not eligible for a credit card because they are under the age of 18. Mr. Anterio Jackson, the founder and CEO at Credit Honor, suggests that teens under the age of 18 should consider, “becoming an additional user on a credit card, getting a job, opening bank accounts, and/or putting one of your household bills under your name to build credit.” Becoming an additional user means to being added to the credit card of a parent or other trusted adult. Use EXTREME caution in doing this to avoid any conflicts about payments or other issues. Be careful to choose someone to do this with the uses only a portion of their credit limit and always pays on time as agreed. Make sure the company issuing credit reports additional users to credit reporting agencies. This may work for some youth that are very responsible and have an adult that is also very responsible with credit but is not a good option for ALL youth. However, all youth can start to show responsibility and prepare to have credit, by holding a job and having active bank accounts.
In addition, Kristin Schell from Building Credit NFP suggests that “teens under the age of 18 [or who have recently turned 18] could apply for a secured credit card.” A secured credit card works similar to a regular credit card except that the payment is guaranteed because there is a required security deposit for the card to open. The required security deposit (generally $200-500) is then locked in a certification of deposit (CD). Then, the account will be open and the secured credit card could be used the same way as a credit card. After making several payments, your credit will start building, but don’t forget to make the payments ON TIME! Ideally, set up automatic payments of your credit and keep a buffer of funds in your bank account so your payments all occur smoothly and on time.
Youth over 18 may apply for their own credit card to build credit. However, their ability to get credit will be limited by how much they earn until age 21. Getting a credit card should be approached with caution! Make sure you are ready. Build savings first so you can pay your bills even in an emergency. Practice using a debit card and live on a budget. When you are ready to apply for a credit card, take your time. Compare cards and choose your credit card carefully. Do NOT apply for several cards at the same time. Once you have a credit card, pay your FULL balance on time as agreed to build credit and avoid interest charges and only use no more than 1/3 of your credit limit.