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Financial Literacy for High School Students: Credit Score

Imagine this. You’re a high school student who’s ready to graduate and start your next phase in life as a young adult. You haven’t taken any financial literacy courses for high school students, and you’re not sure what to do with your new financial freedom.

You have money that you saved from your part-time jobs, and now, you’re old enough to apply for credit cards. You think it’s a great idea to start taking out store credit cards to get discounts on your in-store and online purchases. Next thing you know, you’ve taken out multiple credit cards at once, and you’ve put a bunch of different balances on them.

You’ve heard the words credit and credit score before, but you have no idea how your new credit cards can help you build and maintain credit, leaving you confused about what to do next.

Unfortunately, this is the case for many young adults. They don’t understand that having bad or no credit can hold them back. It can also make their loan payments more expensive and prevent them from renting an apartment.

If you want to learn four tips for building your credit, this financial literacy article is for you. In this guide, we’ll go over four easy things you can do to help your teenager or yourself build credit. But, first, let’s go over what financial literacy for high school students is, why young adults must build credit, and why young adults should have a credit score.

What is Financial Literacy for High School Students?

If you’re a parent, grandparent, guardian, or educator, you may be wondering, “What is financial literacy for high school students, and what topics does it cover?” Financial literacy is essential for all kids above the age of three. There are two age groups for financial literacy and education, and they focus on different topics.

• Financial education for kids: This kind of education helps kids under the age of 13 understand the concept of money and how it can shape their choices.
• Financial literacy for teens: This kind of education is focused on more specific topics that go more in-depth about money. Topics covered include creating positive spending and saving habits, avoiding potential financial mistakes, understanding your first paycheck, and so much more!
  

Why Should Young Adults Focus on Building Credit?

While there are hundreds of things you can learn under teen financial literacy, we’re going to focus on building credit in this article. Primarily because many young adults who are about to be 18 or are 18 years old or older don’t know what a credit score is and how it can help them.

It’s key that teens start understanding credit and how it can help them apply for a loan, buy their first car, or try to rent an apartment. This way they can save money in the long run while achieving and maintaining good credit.

Even if your child isn’t close to turning 18, you can still use the credit-building tips below to help give them learn good spending habits for when they do apply for their first credit card.

Why Do You Need a Credit Score?

According to the Consumer Financial Protection Bureau, “Companies use credit scores to make decisions on whether to offer you a mortgage, credit card, auto loan, and other credit products, as well as for tenant screening and insurance. They are also used to determine the interest rate and credit limit you receive.”

In other words, credit scores show your ability to pay back loans on time. This is reflected in your credit reports and score. Together, these things give potential lenders an idea of you’re spending, your ability to take on debt, and whether you can pay back the credit they give you.

This is also known as your creditworthiness. All in all, these factors can determine how much money you receive for a loan, the length of the loan, and how much you’ll have to pay back in interest.

Ideally, you’ll want to have a good credit score because you can get better loan rates and terms. For example, if you have a good credit score and need an auto loan for a new car, you’ll get lower interest rates and will spend less overtime compared to someone with bad or no credit.

So, how can you start building good credit? Read the next section to find out.

Four Steps Young Adults Can Take to Build Their Credit

Now that you know the importance of having good credit, here are the four steps young adults can take to build their credit. Remember: These tips can also apply to adults and teens. We’ve added to each section to explain more on this below.

Step 1: Research and Apply for a Credit Card

When you turn 18, you become eligible to apply for a credit card. It’s essential to determine whether or not you’re ready for a credit card to start building credit. It can be exciting to apply for a store credit card to get a large discount on your purchase.

However, those credit cards may have large and hidden fees as well as high-interest payments. You must research credit cards and find the best ones for you.

You should ask yourself these questions before opening a credit card:

1.      Am I ready to make regular payments on my credit card promptly?

2.      Do I have a job or source of income that can support my spending?

3.      What is the Annual Percentage Rate? Is it high or low compared to others?

4.      What is the minimum repayment?

5.      Is there an annual fee for owning this credit card?

6.      Are there special introductory interest rates?

7.      Do I get loyalty points, rewards, or cash back for my spending?

Once you answer these questions, you’ll have a better idea about whether you’re ready for this responsibility and what credit card has the most advantages. If you’re a teen that’s not old enough to open a credit card, you can still research them for when you’re ready to apply.

Step 2: Pay Your Bills on Time

When you open up a credit card, you must pay off your credit card each month promptly. If you only pay the minimum payment or make late payments, you may face fees and additional interest on your bill. This can make it harder for you to make your next payment.

If you’re a teen who isn’t eligible for a credit card, you can start practicing “paying your bills on time” by getting a debit credit. You can track your debit card spending and treat it like a credit card statement to understand how much you spend in a month compared to how much you earn.

First New York FCU has a special debit card program called an E-Z Access Account. It’s made for teens who receive their first debit card. Under this account, parents can monitor their child’s spending. There are also a variety of features that prevent teens from overspending while finding the value in saving.

Remember: Always pay bills on time. This shows possible lenders that you are reliable and will increase the number of funds that you can borrow.

Step 3: Don’t Open Too Many Credit Cards at Once

While it’s okay to own a variety of credit cards, you mustn’t open too many accounts in a short period. It’s a good idea to wait six months before you open another credit card. That’s because each time you open a credit card an inquiry is put on your account.

If you have a lot of inquiries on your account in a short time frame, this will significantly reduce your credit score. Even if you only have a few inquiries on your account because you’re opening a few credit cards at once, this will still decrease your credit score. It won’t reduce it as significantly, but it will still be affected. Depending on the type of inquiry, this may last for only a few months up to two years.

Step 4: Keep Your Debt Below 40%

When you open a credit card, you will receive a credit limit. A credit limit is an amount the credit card company will allow you to spend in a period based on your credit history and other factors.

However, just because you get a credit limit, doesn’t mean you should spend all of it. This will result in your maxing out your credit card which will impact your credit score. You should also avoid increasing your credit limit if you struggle to pay off your current maximum.

It’s key that you keep your credit debt below 40% to show that you aren’t using all of your available credit limits. This will help increase your score.

According to CNBC, “You only want to put 15% of your gross income toward your monthly credit card payment.”

If you’re a teen who’s unable to open a credit card, you can practice this by creating a budget. Take your current income from chores or work and use it as the base of your budget. Take 15% of that gross income and you should determine how much you should be spending on your debit card per month.

Need More Advice? First New York Can Help

If you’re turning 18 or already are 18, First New York Federal Credit Union (FCU) can walk you through the best ways to build credit. We also offer Visa® Credit Cards that have special features that can set you up for success as you start to build your credit.

You can visit us online or contact us today if you have any questions or need help building your credit.