Credit for teens: what they need to know

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Credit Sesame discusses credit for teens and how to start their financial education.

Kids can start their financial education at a young age. Starting to teach the basic principles of debt, money management, and credit before college is a good idea. Students should have a firm grasp of financial concepts before they pack their bags. If you plan to give your teen a credit card, make sure they know how to handle it.

We all need to know about good credit

In the United States, a great credit score is one of the ways to achieve certain financial goals. If you plan to make a major purchase, you could save up until you have enough cash set aside. It is possible to buy a home that way, most of us would prefer to get in 30 years earlier on borrowed money.

The difference between a great credit score and a poor or average credit score affects the interest you pay on debt. In turn, this affects the money that stays in your pocket. You might be able to buy a car with a credit score of 620, but your interest rate will be higher than the customer, whose score is 790. For those with poor or average credit, financing is more expensive. Low credit scorers pay more in monthly payments and overall cost for the privilege of using lenders’ money to buy what they need.

Credit for teens

Your child probably learned basic math skills in elementary school, like how to count change after making a purchase. Later, though, attention shifted to shapes and algebraic formulas. Typical American education includes little about our credit scores and credit histories, although those items are of critical importance to us all when we become adults. It’s mostly down to parents to help teens learn. A fundamental knowledge of credit can help your teen in several ways.

  • Understanding how credit cards work will help your child avoid over-using revolving debt.
  • Managing credit responsibly can open the door to better interest rates for big-ticket items when the time is right.
  • Knowing how to monitor their credit could help your teen avoid becoming the victim of fraud.

With a firm grasp on a few basic principles, your teen will be well on the way to responsible financial management, an outstanding credit score and great financing opportunities. The main topics you need to address are:

Teaching your teen about money and credit

  • Explain that credit means debt. Debt means money that you owe until you pay it off.
  • Teach your child to save for smaller items like cell phones or iPods
  • Encourage your child to have savings strategies, like one-third of an allowance or half of all birthday gifts
  • Explain how to build a great credit score, like using a credit card sparingly and paying it off every month. Perhaps start with a secured card in the child’s name, using their own savings to secure the card.
  • Explain the right way to use a credit card is for convenience when you can afford the payments and the balance due won’t remain high
  • Reinforce the wrong reasons for using credit cards is to buy something you can’t afford.
  • Discuss the cost of interest at different rates and the pros and cons of paying an annual fee
  • Explain what credit monitoring is and why it is important
  • Ideally, don’t co-sign. Let your child build credit the old-fashioned way.
  • If she gets into a financial jam, don’t be tempted to immediately bail them out. Enroucage them to seek free or low-cost assistance from the National Foundation for Credit Counseling or the American Consumer Credit Counseling Service.

The more your child understands about credit, the more likely they are to become an adult who is able to maintain excellent financial health. The earlier you start teaching, the more your child can internalize the concepts, and the stronger the foundation of knowledge will be.

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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.

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