10 Things Parents Need To Teach Their Teens About Credit

Marquese Lewis Author

Each person may have different ways of handling their finances. But as parents, we have the responsibility to teach our teens the basics of credit.

10 Key things parents should teach their teens about credit

As a parent, one of the best gifts you can give your child is financial literacy. It is best to start your child’s financial education journey early in life, so they can avoid making financial mistakes.

Introducing your teen to the secrets of credit in finances is a good way to prepare them for building good credit scores. In this article, we’ll share ten things you need to teach your teen about credit.

Here are 10 important things to teach your child about credit and how you can go about it.

1. What credit means

One of the first things to learn about credit is what it means. Help them understand what credit is and how it would be useful for them as they build and manage their finances. Teaching about credit also entails talking about how to build credit and in what situations it will come in useful.

Credit, essentially, is being able to borrow money or have access to goods and services with the intention to repay later. Lenders decide whether to lend to you based upon how credit-worthy you are.

2. Credit score

Once your teen fully understands the concept of credit, teaching them how to build a good credit score is the next on the list. A credit score is a three-digit number that determines if you will be able to access or qualify for loans from a lender.

Teach them that to qualify for credit loans, they need to build a high credit score that shows they are not a risk to the lender. The credit score ranges between 300 to 850, and three credit reporting agencies assign the credit score.

To build a good credit score, teach them to start early and start small. The best way to start is by obtaining a credit card or charge card and spend within their means. This means not abusing access to the credit loan, spending within their limits, and paying back bills on time. By doing this their credit score will increase and so will their credit worthiness.

3. Credit cards

Credit cards are an essential part of teaching about credit. Explain to your teen how to use a credit card correctly and wisely. Help them understand that credit cards are not magic plastic cards that can get them what they want whenever they like.

Teach them to understand that they are responsible for how they use the card, and there are consequences for not paying back the credit on time. A good rule of thumb is to pay the card off in full every month in order to avoid paying interest and penalties. Paying the card in full is the smart thing to do because it means they’ll be able to avoid incurring interest on the card. To help them get started, you can help them by getting a secured card when they turn 18, so they can train safely and learn on time.

4. Debit cards

Debit cards should not be left out, they are also important in this training. Teach them how debit cards differ from credit cards and the best situations to use either of the cards. You can take this a step further by opening a joint checking account and giving them access to a debit card.

5. Budgeting and utilization

Budgeting is a vital aspect of learning about credit. Teaching them to stay in line with a spending budget can help them build a good score. Credit scoring agencies rate you on how well you utilize the credit you have available. If you have low utilization (i.e. you use only a small amount of the credit you have available), you are considered more responsible with your credit. The wise thing to do is not spend more than 20% on a credit card’s available credit.

6. How credit score affects interest rate

It’s important to teach your teen how their credit affects interest rates when taking loans or paying for items. 

The better their credit score, the better the interest rates they get. Interest rates are a percentage charged on the total amount of money they borrow. The interest is the cost they pay for borrowing money. But, if they keep their credit positive, they get lower interest rates and pay less on items.

When they have a high credit score, it increases the borrower’s confidence in giving them loans because high credit scores reflect that they are financially responsible.

The more credit-worthy they are, the more likely they are to qualify for loans and lower interest rates.

7. Balance checking

Teach your child to always remember to check their credit card balance at least weekly. Not only can they monitor their spending but they can also monitor fraudulent activities that may take place. When they get a card, they should download the app for the company and frequently check the card’s balance. It helps them spot any activities of fraud and stay on top of their finances.

8. Pay it off (in full) and on time

This goes without saying but emphasizing the need to pay off the balance on the card in full every month is necessary. Interest causes the credit card balance to grow exponentially and thus leads to paying more than the item costs. Not only that, but late payments can affect your credit worthiness and your credit score. So it is important to teach them about the consequences they will incur by postponing the repayments of their balance.  When they don’t pay it off on time, they incur a high interest which causes the credit card balance to grow rapidly, leading to extra charges on items purchased

Teach them about the penalties and extra charges that will make paying back even more difficult. 

9. Saving and investing

This is also essential to teach your teen because it is not only a life skill, but their savings account can also help them to qualify for a loan.

Teach your child to set aside some amount from their earnings in a savings account as it helps them to build their assets. Some lenders may require information about their assets to help them make a lending decision.

Since many parents don’t know much about investing, buying them a course on investing is a good adulting gift to teach your teen about investing wisely in their adult life.

10. Credit history

It’s important to also teach your child to review their credit history frequently. This helps them to see errors they may have made in the past and how to avoid them subsequently. It also helps them to correct bad credit habits they may have. Remind them that credit issues like late payments and bankruptcy will remain on their credit report for 7 years and will have a major impact on their credit worthiness and ability to get good interest rates on a loan.

Adulting doesn’t have to be so difficult

Teaching your kids about finances early is one of the basic steps of raising a financially smart adult. If you'd like to go more in-depth in teaching them about financial planning, investments, or other important details about being an adult, you can arm yourself with more knowledge from these adulting courses.

Categories: Financial Planning and Investing