Why You Need To Teach Your Kids About Credit


Financial education should begin at a very young age. Don’t wait until your child is ready to go away to college to teach the basic principles of debt, money management and credit. He should already have a firm grasp on those concepts before he packs his bags. But at what age should you begin teaching your child about credit?

Children can learn age-appropriate money lessons starting from about the age of 3. Credit is a more complicated concept that may be introduced around age 11 and developed continuously until your child is an adult taking care of his or her own financing needs. The President’s Advisory Council on Financial Capability suggests a variety of age-appropriate activities that can help you coach your child to a solid understanding of credit. Here’s a look at the suggested breakdown and lessons by age:

Adolescent (11-13 years old)

Lesson: credit cards are loans.

Teach your pre-teen that credit card charges are loans that cost money when they are not paid in full each month. Show your child credit card advertisements and offers in your junk mail or online, and compare interest rates, fees and APRs.  Discuss how a person might obtain a credit card with great terms, and why someone might get stuck with an expensive credit card. Explain that “good credit” mostly means paying bills on time and keeping debt low. Talk about the differences between debit cards and credit cards, and discuss when it is appropriate to use one or the other. Use a repayment calculator to show how long it takes to pay off charges by making minimum payments only.

If you haven’t done so yet, introduce the concept of online privacy and safe behavior on the internet. This is also a great time to talk about identity theft and ways to prevent it.

Teenager (14-18 years old)

Lesson: budget, save, control spending.

Show your child (preferably with his own money) how budgeting and saving can help him avoid debt. Encourage him to have and use a debit card. Monitor it closely. Show your child how to track spending and balances online. Let her see you make a credit card purchase and pay the balance when the bill arrives. Show her the terms, the bill and any interest or fees you pay. Revisit the concept of the cost of debt often. Use a variety of examples to show the length of time and total cost of making minimum payments only to pay off a purchase (a new TV, an iPod, a vacation or any other purchase your child is interested in). Emphasize – vocally and by example – the importance of paying charges off in full every month.

At this age identity theft prevention becomes critical, particularly when your child begins to apply for college and must frequently hand over her social security number or other personal information. Draw a parallel between identity and credit and the ability to thrive financially in a credit-based society such as ours.

Young adult (18-99 years old)

Lesson: avoid debt while building healthy credit.

Teach your young adult what goes into a good credit score. Don’t cosign for your child – let him get his own credit card, even if it’s a secured card to begin with. Help him evaluate the different credit cards available to him and choose the one for which to apply. Explain different types of emergency expenses that might come up and the importance of having credit available for when it happens. If you need a car repair or a new set of tires, show your child how much it costs and explain where the money came from to pay the bill. Help your child get comfortable with responsible credit card use by encouraging her to pay one monthly expense with the credit card and then pay the credit card balance off each month.

Once your child starts to use credit cards and build credit, explain the importance of obtaining free credit report cards each year from AnnualCreditReport.com. Don’t be afraid to share your own credit reports, especially if you have negative items – they are excellent teaching tools. As your child becomes more familiar with credit concepts, introduce ongoing credit monitoring and score-building exercises. Identity theft prevention should now be a daily practice.

Even if your own credit behavior isn’t perfect (you carry a balance, perhaps), you can show your child how to learn from your mistakes. Indeed, teaching your child about credit might turn out to be the perfect opportunity to improve your own financial behavior in order to be a good example.

We all need to know about good credit

A great credit score is, in this country, the primary means by which we achieve certain financial goals. You don’t have to depend on your credit score for major purchases, but the only other option is to save up and pay cash. While it may be 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 can be seen in the money that’s in your pocket.  You might be able to buy a car with a credit score of 620, but the interest rate you pay will be sky high compared to the rate offered to the customer whose score is 790. For those with poor or average credit, financing is simply more expensive. They pay more – in monthly payments and overall cost – for the privilege of using other peoples’ money to buy what they need.

Before they leave the nest

Why teens might not know

Your child probably learned basic math skills in elementary school, like how to count her 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 up to parents to help teens learn.

Why your teen needs to know

Understanding how credit cards work will help your child avoid the trap of revolving debt.

Understanding credit, in general, will open the door to better interest rates and approved applications for big ticket items when the time is right.

Understanding how to monitor his credit could help your teen avoid becoming the victim of fraud.

What to teach your teen

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

– What is a credit score?

– How does credit affect me?

– How do I keep tabs on my credit?

– How do I protect my credit?

Teaching your teen about credit

– Explain that credit means debt. Debt means money that you will owe someone until you pay it off.

– Help your child learn to save for what she wants, especially big ticket items like cell phones or iPods

– Help your child set a standard for automatic saving, like one-third of his allowance or half of all birthday gifts

– Go slowly, but at some point introduce the ways to build a great credit score, like using a credit card sparingly and paying it off every month. Start with a secured card in the child’s name, using his or her own savings to secure the card.

– Explain the right and wrong reasons for using credit cards. Right = convenience; wrong = to buy something you can’t afford.

– Explain the cost of interest at different rates, and the pros and cons of paying an annual fee

– Help your child learn how to monitor his credit

– Don’t co-sign. Let your child build credit the old fashioned way.

– Don’t bail out your child. If she gets into a financial jam, help her seek out free or low-cost assistance from the National Foundation for Credit Counseling or the Consumer Credit Counseling Service.

Click for tips from the Institute of Consumer Financial Education.

Here is an example from Financial Expert John Ulzheimer on how to teach teens about credit by putting it in perspective.

Each year since 2005 I’ve been asked to speak to the seniors at The Westminster Schools in Atlanta. I speak to the 100 senior girls one week while the 100 senior boys are getting their fill of the venereal disease expert, and then the following week we swap. My time is spent trying to convey to them that for the next four years they’re going to enter a world where they’re going to be treated like adults, especially by the consumer credit system.

Here’s my core message:

“You mess up on a quiz and you can make it up with the next quiz.  You mess up a test and you can make it up with the mid-term. You screw up the mid-term and hopefully you can make it up on the final exam. Point being, the pain of screwing up tests is fixable.”

It doesn’t work this way in the credit reporting and credit scoring worlds. If you miss a payment on a credit card bill, it takes seven years for it to disappear from your credit reports. If you mess up and not pay your final utility bill, the collection takes seven years to disappear from your credit reports. To put that in perspective… you’ll have earned an undergraduate AND a law degree by the time the negative reporting has been removed.

The challenge is, having a fully successful credit talk with college-bound high school kids is like trying to explain to a non-parent how it is to have an infant… it’s next to impossible.  That certainly doesn’t mean you throw up your arms and leave your 18-year-old to learn about credit through trial and error.

There are some angles for getting your message across, successfully. Here are my suggestions.

Show, Don’t Just Tell

I think trying to tell young kids that they should avoid credit cards is about as effective as telling them not to drink. In fact, I would suggest giving your kids a credit card a year or two before they’re packing for college. It would certainly grab their attention and it gives you a controlled environment in which to teach them the right and wrong way to manage the card.  It’s not unlike a learner’s permit for a credit card.

Share Your Mistakes

I’m not so far removed from that group that I don’t remember how I was. I didn’t want to listen to anyone, especially people coming to talk about a boring topic like credit reports and credit scores. I certainly didn’t care about my credit when I got to college, which is probably why I cheerfully filled out and returned that student credit card application waiting for me in my student mailbox.

I know a $300 credit limit isn’t much but I sure did some damage! Thankfully, I was responsible enough to make the minimum payments. By the time I graduated, I had about $1,700 in credit card debt, which in the grand scheme of things isn’t a lot unless you’re unemployed and living at home with your parents. Brutal!

Bring Out the Job Card

I’ve been taking the “some employers look at credit reports” angle lately. It’s 100% true and it’s heavy artillery. Nothing shuts up a room full of high school kids faster than telling them that their impressive (and expensive) college degrees can be somewhat negated by a poor credit report caused by not paying their utility bills at the frat house.

Take It Seriously

I know what some of you are thinking: Are you serious? Not only am I very serious, I believe parents who pretend that their kids aren’t going to try new things in college have their heads in the sand, which is dangerous.  Avoiding the credit card talk is no different than avoiding other critical topics like unprotected sex, “no means no”, drugs, tattoos, and drinking and driving.

Don’t get me wrong: you don’t have to be Cliff Huxtable to have this discussion. And you certainly don’t have to convey your thoughts in a way that would win you an Emmy award. There is no script. There are no “best practices.” Nobody knows the best way to convince your kids that using credit while away at college is perfectly fine — if you use it responsibly.

Just don’t let them walk out that door without making an effort.

The bottom line is that the more your child understands about credit, the more likely she’ll become an adult who is able to maintain excellent financial health. The earlier you start teaching, the more your child will internalize the concepts, and the stronger the foundation of knowledge will be.

Going off to College

At some point during college or upon graduation, chances are you’ll need a car loan, want to rent an apartment, apply for a job or qualify for a credit card. And to fulfill those goals, you’re going to need a good credit score.

But these easy-to-make mistakes could squash your financial hopes and dreams.

1. Paying bills late.

On-time payments are the most important factor in developing good credit, accounting for 35 percent of your credit score. “Students think that if they don’t have a credit card, they don’t need to worry about a credit score,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.

Wrong! If you don’t have a credit card, things like monthly utility bills, rent, student loans and car loans can still affect your credit history. Paying late (or not paying a bill at all) will land the bill in collections and end up on your credit report card so Gallegos stresses it is important to pay every bill on time.

Do that by opening every bill (whether you receive them paper or electronically) as soon as it arrives. “Immediately pay them or schedule a payment for a date prior to the due date, or create a simple system to make sure you pay every bill on time, whether with a folder on your desk or an online calendar,” says Gallegos.

2. Maxing out credit cards.

A portion of your credit score is based on the percentage of your balance in relation to the credit limit on your credit cards. This is called revolving utilization and to maintain a good score you should never use more than 30 percent of your available credit, says Sophia Bera, a certified financial planner and founder of Gen Y Planning.

3. Failing to update your address.

College students often move every year while in school. And it’s easy to forget to have mail forwarded or to contact all creditors with your new address.

All those bills floating around the snail mail system, or getting marked “undeliverable” can lead to a forgotten account being sent to collection. “An item in collection will negatively affect your credit score until it’s satisfied,” says Bera. And even if you pay it off, the blemish will remain on your report for up to 7 years, and could send a message to potential creditors that you’re a bit of a deadbeat.

4. Failing to fix errors on your credit report.

According to the FTC, one in four consumers has errors on their credit reports and those errors could affect credit scores, shaving off anywhere from a few to several precious points. Even one point can be the difference between a “good” score or being labeled “fair” or worse. In fact an FTC study says approximately one in 20 consumers had errors that resulted in losing more than 25 points from their credit score.

Common errors include a credit report containing information that belongs to someone else. Maybe your name is Mary P. Smith and your mom is Mary K. Smith, or you have the same name as a deadbeat debtor across town or across the country.

You can obtain one free copy of your three credit reports (TransUnion, Experian and Equifax) once a year at www.annualcreditreport.com. Pulling one report every four months helps you spot and correct an error (you can dispute them online or in writing).

5. Sharing PIN numbers

Ever given out your PIN number so a roommate, boyfriend or best friend could take out a cash advance from your credit card? If so, shame on you! Gallegos says you should never divulge those four magic digits until you’re engaged, moving in together, or are 1,001 percent sure this really is THE one.

Besides giving out your PIN number, taking out a cash advance on your credit card is a bad idea for a number of reasons. Before you make this rookie mistake, be sure to read up on common credit card traps for college students — and why you should avoid them.

Even if you’re BFFs or in love today, a break-up or argument means your frenemy or former love has access to your funds. “And if the relationship ends badly, your bank account, income and financial future is at the mercy of a one-time love,” he says.

Already given out your PIN number? Contact your bank to change it. And going forward, Gallegos suggests you “set a policy that you’ll each take responsibility for your own finances including ATM withdrawals and debit transactions.”

Post-grad: Moving into adulthood

For recent graduates, the end of college means a wave of new challenges and new experiences. While new grads may be focused on more pressing issues—like resumes and landing that dream job—it’s important to pay particular attention to personal finances in this transitional time.

Building a strong credit history takes time, diligence and discipline. Mistakes made now can have major implications on your ability to gain access to credit and loans for years to come.  Sounds overwhelming? Relax. Here’s your six-part guide to building a perfect base of credit. Follow these simple tricks and you’ll be rewarded in the long run.

Choose Cards Selectively and Apply Seldomly

Credit card companies make their cards look attractive with rewards and other benefits—it can almost seem like free money. It’s not. Be selective about which cards you apply for and apply for one credit card at a time. Most credit applications result in a hard inquiry. If you have too many hard inquiries in a short period of time, you may be less likely to be approved by lenders when you apply for additional lines of credit in the future. Sure, it’s good to have some credit. Indeed, it’s the only way that you can effectively build credit. But you only want so much credit and you never want to use those cards to rack up a bill that you can’t repay when the bill comes at the end of the month.

Look into secured cards as a good option to build credit. With a secured credit card, you pay a deposit as collateral to protect the creditor in case you default on your payments. Then you use the card as you would a normal credit card and pay the bill each month. Before signing up for a secured credit card, you should find out what fees are involved and if the issuer reports on-time payments to the credit bureaus so that you can build credit. The hope is that you would eventually graduate to an unsecured credit card and get your deposit returned after establishing a pattern of on-time payments.

Use Your Cards Wisely

To build strong credit, use your credit card to buy everyday items, preferably things that you’re getting rewards points and cash back for. Then, when you get the bill, you pay it off in full. Now is the time to teach yourself financial discipline—it will pay off in the long run.

Become an authorized user.

If you have a parent or other relative with good credit who’s willing to add you as an authorized user, that could help serve as a steppingstone to your own credit card, assuming that the person pays their bills. In some families, the authorized user’s name is simply added to the credit card for credit-building purposes, but the user doesn’t have access to the card. In others, the authorized user may have a card that they’re allowed to use in moderation so they can practice using credit. If you become an authorized user, make sure you discuss expectations with the primary card-holder to avoid any nasty surprises.

Pay Down Your Student Loans

You’ll likely feel a bit daunted when you look at your monthly student loan payment. However, you have a number of options between paying it in full and not paying at all. Deferment and forbearance are two ways that you can kick the can down the road, but they’re not your best options. If you’ve got a student loan payment that’s too high, your best option is to negotiate with the company and try and make a reduced payment every month. You’ll be paying down the debt at a slower rate, but it’s a start. You may also consider consolidating your loans into one, which may help you lower monthly payments and better manage your outstanding debt.

Credit Sesame takes the guesswork out of managing your student loans.  Sign up for a free Credit Sesame account to see your student loan dashboard, get your personalized student loan analysis and repayment recommendations, plus your free credit score and more. 

Pay Your Bills on Time

It might sound like a no-brainer, but it’s a mistake that a lot of people make when they venture out into the world of financial independence. Your payment history contributes to 35 percent of your credit score, and on time payments matter. Set up alerts and use online payments to help you stay current when it comes to your bills. Remember, any payment more than 30 days late will likely be reported to the credit bureaus as a delinquency. Do yourself a favor by staying on top of your bills. It’s one of the easiest, simplest things you can do to build your credit.

Check Your Credit Report Card

Check your credit report card at least once every year. A recent report by the Federal Trade Commission found that 20 percent of consumers had an error on at least one of their three credit reports. Errors may impact your ability to receive financing on things like a mortgage or car loan or limit your access to the best credit cards. You’re entitled to a free credit report from each of the major credit reporting agencies annually. You can stagger these out over the course of the year, allowing you to check your credit report for free three times every year. This allows you to see, in real terms, how your hard work is paying off in terms of your credit report. It also will let you resolve any outstanding issues that might be on your credit report, such as incorrect information or even bad debts that you aren’t aware of.

The best graduation gift that you can give yourself is the gift of good credit. This isn’t a one-time gift, but a series of behaviors that will pay dividends over time. For example, a 50-point difference in your credit score can save you thousands or even tens of thousands of dollars over the life of a car loan or home mortgage loan. Make smart decision now and you’ll be rewarded in the long run.

More on Student Loans from Credit Sesame:

What to Know About Private Student Loans Before You Borrow

The College Trap: Are Student Loans Worth It?

Ask the Expert: Are Student Loans Considered Bad Debt?

Should You Refinance Your Student Loans?

You can trust that we maintain strict editorial integrity in our writing and assessments; however, we receive compensation when you click on links to products from our partners and get approved.
Published June 15, 2015 Updated: April 29, 2016
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