This article was written by the FICO® Score Open Access team. It has been published on our website with their permission.
Getting your teenager ready for college not only involves researching universities, applying and being accepted, it’s also about preparing them to be adults. Responsibilities such as establishing and managing their credit profile are now our reality as my daughter prepares for college in the fall. Since the beginning of her junior year, she has been exposed to college research, essays and applications. Now as a senior, she has been researching more schools, editing more essays, to finally hit the send button at 11:59pm on the last day each application is due. Sounds familiar? Well, be reassured, teaching them healthy credit behavior is probably a lot easier, and definitely as important. This is why we started showing her steps to establish credit at the same time as we started college research. Now, where to start? We started from what we knew and how we can relate these behaviors to teenager priorities:
Payment History represents 35% of your score. At this point, there isn’t much of Paying Your Debt On Time since she’s not 18 – thus unable to establish a credit account, however a checking account can help teach her to manage her money responsibly, such as “if I spend all my money on clothes, I will not be able to order my lunches for next month”.
Amount You Owe represents 30% of your score. We’re prepared to get her a student credit card on her 18th birthday This new responsibility will teach her about paying bills monthly and most importantly the concept of “If I use up all of my available credit, I won’t have any room for other expenses”
Length of Credit History represents 15% of your score. As we await for her to have credit in her own name, we’ve added her as an authorized user on our own credit card account. Authorized users may use the account, but are not financially responsible for any payment (from the creditors perspective anyway! Scary). The good thing is that primary users may set a limit to the amount authorized users may spend each month (phew! Better). Once my bank has my daughter’s SSN, and they include her on their reporting, her first footprint in the credit world has been made - now we let time run its course.
New Credit represents 10% of your score. The student credit card (we mentioned above) and any other new credit account she applies for, will enter in this category, and too many new accounts inquiries may hurt her credit profile. She’ll just need to be aware and careful to only seek the credit she needs – and more importantly – can manage.
Types of Credit in Use represents 10% of your score. A student loan would enter in this category, but we’re waiting to see where she goes to college, what the financial options are, and if a student loan is the best fit. Over the course of her credit journey, it’s likely that installment loans (car, etc.) are in her future.
The earlier you using credit the sooner your Payment History and Length of Credit History will start growing. A good credit score is not only important when getting ready for large purchases like a car or a house, it is also the reflection of responsible behavior that many organizations look at when evaluating you, such as insurers or employers.
We’ve planted the seeds for her use of credit. We’re also working to teach her responsible financial behavior and the hardest part? Waiting on the college responses!
By FICO® Score Open Access team
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