How teens can build credit: Money Matters (2024)

What's that saying -- as seen through the eyes of babes?

A few weeks ago, I was a guest teacher for five high school business/ finance classes at Brecksville-Broadview Heights High School. We talked about the most important things that kids need to learn about managing their finances, now and in the next few years. I was intrigued by some of the students' questions -- basic yet smart.

As a follow-up, I asked the two teachers who invited me, Kevin Good and Jason Simonetti, to have their students submit more questions to me in writing because I thought the questions (and the answers) would help a wide section of readers.

Here are some of the questions. I expect to do at least two more columns in the next few weeks featuring some of the others.

Q: Do you have to become an authorized user on a credit card for any specific time period before you can inherit that credit score?
12th-grader

A: The short answer, no. If you become an authorized user on a credit card(most likely your parent's), then it will probably take about a month for your credit file to update to reflect this account being added. You will inherit all of the payment history -- make sure it's good before your family does this. And you will inherit the balance-to-credit-limit ratio.

The authorized user doesn't have to have the card in his/her possession or even know the account number.

Now, a slight tweak to your question: If you are added as an authorized user, you do not inherit the account holder's credit score -- just his or her account and its payment details. Any other accounts the parent has will not show up on your credit history, unless you become an authorized user on those too.

A note of caution: If your parents have multiple credit cards, they should check with their bank to make sure that that bank reports multiple authorized users to the credit bureaus. Some banks only report two people on an account; some report four; some don't have a specific limit. Bank of America is one bank that reports up to four joint owners/authorized users to the credit bureaus.

If your bank says it doesn't report any authorized users, ask for a supervisor or insist that a branch manager research this. Over the years, I have found that many front-line bank or credit card customer service workers are ridiculously uninformed about credit scores and credit histories. I have caused many companies to put out memos to their workers after I tell the corporate office the horrible misinformation they're telling customers.

I don't see any need for a teenager to get added as an authorized user on more than one account. Having that one account for a year or so should allow you to build a bit of a credit history and make it easier for you to get your own credit card or small loan in the near future, assuming you having income.

You didn't ask, but one of your classmates did in person last month: Should a student get added as an authorized user or joint owner of an account? The answer is always an authorized user. It's easier for a parent and for the student to remove an authorized user. It's virtually impossible to be removed as a joint owner.

Q: When is it a good time to start having credit?
12th grader

A: In my opinion, 18 years old. That doesn't mean an 18-year-old should necessarily have a credit card. But young adults should start building a credit history as soon as possible.

As I've said many times, building credit is a chicken-and-egg kind of thing. It's difficult to get approved for a credit card or loan if you don't have a credit history, but you can't start building a credit history until you have a credit card or loan on your file. That's why becoming an authorized user on an account is often a good option.

A good credit rating (or even a decent credit rating for a young adult) also helps you when it's time to get your own car insurance or rent an apartment without a co-signer.

If becoming an authorized user doesn't work for you for whatever reason, then there are several credit card companies that extend small credit lines to students. Among them are the Discover It card, BankAmericard Visa, 1st Financial Bank card, Capital One Journey card for students and Citi Thank You Card for students.

Q: Is there any risk with putting all your money in one account or should you spread it throughout several different banks/bank accounts?
12th grader

A: I generally advise adults who have regular income and household responsibilities to have checking or savings accounts at two different banks, or a bank and a credit union.

It's not that your money is truly at risk at only one bank, assuming you have less than $250,000. If a bank were to fail (essentially go bankrupt), then bank accounts are insured by the U.S. government for up to $250,000 each.

However, it's still good to have money at more than one bank in case you have fraud with one account -- you can access the other and continue paying your bills while you're sorting things out. Also, if you have an ATM or debit card and that bank's network is down or there's a problem with your card, it's good to have another card to turn to in a pinch.

It can also be convenient to be able to access the ATM network of more than one bank, so you can avoid $2 and $3 fees for using another bank's network.

Q: Is it smart to have multiple credit cards that you commonly use or should you stick to having only one or two cards?
11th grader

A: For a student, one card is fine to start. If you use this card, you should set up automatic minimum payments every month from your bank account, just in case you forget. Once you have learned to manage that one card, then it's a good idea to have more than one credit card, assuming you can handle it. It's always good to have a backup in case of fraud, a retail breach, lost card, etc.

As a full-blown adult, you should be good with two or three all-purpose bank cards (MasterCard, Visa, Discover or American Express). Note that Discover and American Express aren't accepted everywhere. You may also choose to have a couple of retail cards for in-store discounts or points, such as Macy's, Kohl's or a gasoline card. Realize that those retail cards can't be used at other stores.