Building credit as a teen can be one of the best decisions you’ll ever make.
But building credit as a teen is also viewed as being impossible. Many of the basic ways of building credit young, such as getting a credit card or a loan in your name, cannot be done until you’re an adult. Alternatively, many people are unsure about being a co-signer on these for someone who does not have a stable income source or is working part-time in a minimum wage job.
It may seem difficult to get a head start on your credit score, but there is a much more simple approach that requires minimal effort or unsureness from adults in your life.
Why Should You Care About Building Credit as a Teen?
There is a tiny percentage of people who will never have to borrow money. Because this isn’t the case for most of us, it is important to ensure your borrowing power is maximized from an early age.
Depending on your situation, you may require some form of loan shortly after high school. Most 18-year-olds will walk into a lender meeting with zero credit profile. This can lead to money being lent to you at a higher interest rate, or your loan amount is lower. Even worse, they may choose that you are too big of a risk to lend to!
Even if you don’t believe you’ll have to borrow money when you become an adult, there are other things that can be affected. Perhaps your education or employment requires you to move away from home. It is common for landlords to access your credit score to determine whether or not you will be a reliable tenant.
There are other major purchases new adults look to make that are reliant on a good credit score. If you choose to buy a vehicle that requires financing, your credit score can impact the interest rate on the loan. The lender may even choose to not give you the loan at all. Even if you have a strong deposit or down payment, the lender may see you as a risk to pay it back in full.
My Early Experiences with Lenders
I had these issues when I was a young adult looking at making my first major purchases. When looking to buy my first car and rent my first apartment, I only had a credit card to back up my ability to pay it back. Even though credit cards impacted my credit score positively, it was still almost not enough to allow me to purchase the items I wanted.
It became even more difficult when purchasing my first property. I had to get letters of recommendation from my cell phone company, bank, and credit card companies backing my ability to pay back. Although I had a good credit score, it still wasn’t enough.
Piggybacking can be a good tool to give future teens a head start so they can potentially avoid the same issues I had.
What Is Piggybacking?
Piggybacking is the process of becoming an authorized user of someone else’s credit card. By becoming an authorized user, you reap the benefits of the card owner’s credit history without the risk. You don’t even need to use the credit card at all to gain these benefits. The main account holder can continue to use and pay off their card as they wish. As an authorized user, you can start to build credit as a teen by continuing your normal day-to-day life.
Piggybacking also comes with risk. It is important that if you consider piggybacking, you should ensure that the card you are an authorized user for is paid back on time. Additionally, being an authorized user on a long-standing credit card with an active payment history will benefit you even more. If these do not happen, it can have a negative effect on your credit score. This isn’t ideal, as you have no basis to build credit under your own power yet.
I believe the most important factor is the relationship you have with the other person. If you want to become an authorized user on someone else’s credit card, choose carefully. If the above factors are met, but you have a falling out with the main cardholder, they can quickly remove you as an authorized user.
There is a whole generation of side hustlers who use piggybacking as a passive income method. There is a lot of controversy around this, as it falls in a weird legal grey area. I would encourage you to not look at a stranger as a person to piggyback off of. A family member or friend will work perfectly.
Downsides of Piggybacking
Piggybacking on someone else’s credit card may seem like an easy method to begin building credit. However, there are a few downsides that both teens and adults should consider.
Teens who build credit through piggybacking never learn how to manage their finances through real-life experiences. Because piggybacking can allow them to receive higher limits on credit cards or loans in the future, they may spend more recklessly than anticipated. This can have a major negative impact both financially and on a person’s credit score.
Not all students come out of high school with knowledge in these areas. Interest and payments can quickly get out of hand without making regular payments. I have seen a lot of former students get into poor financial positions quickly after graduation.
Because so many factors affect your credit score, it is important to keep these under control at all times. Don’t think of piggybacking as a do-all option. Use piggybacking in conjunction with other personal finance methods so building credit as a teen is possible.
Financial literacy is becoming more important for current students. Many are leaving high school with a diploma and a dream, but lack the knowledge to make sound financial decisions. These dreams can quickly become harder to reach.
Many people turn towards side hustles as a money-making opportunity. Although I am a huge supporter of this, it should be done alongside other methods. Getting lower interest rates, making the right investments, and paying off debts quickly can help people reach their financial goals faster.
And who knows, maybe you’ll find yourself part of the F.I.R.E. movement.
I encourage all of my students to look at piggybacking as the first tool to starting building credit as a teen. Additionally, I encourage parents to add their children as authorized users to give them a head start.
What are your experiences with piggybacking? I would love to hear them in the comments below.
Thanks for reading!