To be prepared for a successful adulthood, kids need to learn about credit and how to use it. Many states don’t require financial literacy courses in school and those that do may not cover all the important topics.
If you’re a parent, it’s important to take the initiative to teach your kids about credit and how to use it. Even if you’ve made financial mistakes of your own, you can help make sure your kids will be prepared to build a successful financial life and avoid making costly credit mistakes.
Start with these five important lessons to teach your kids about credit.
1. Credit can be important for meeting financial goals.
Explain to your kids that credit is a tool that can be necessary for accomplishing important financial goals throughout your life. You can start teaching this basic lesson when kids are in elementary school and reinforce it throughout their teenage years. Explain that your credit history is often considered when you apply to get a job, rent an apartment, buy a car, or buy a home.
2. Credit scores and reports are the building blocks of your credit.
As teens, your kids need to learn the basics of how credit works. That includes understanding the following:
- Credit bureaus are the companies that collect information about your credit history. The three main credit bureaus are Equifax, Experian, and TransUnion.
- Credit reports are the compilations of all the financial information each credit bureau has assembled about you. You have three credit reports, one from each bureau, and each one includes a credit score.
- Credit scores are three-digit numbers that rate your use of credit and can be used to predict your financial behaviors, such as the likelihood that you’ll repay your debts. Credit scores typically range from 300 to 850, and higher credit scores can increase your chances of being approved for credit, getting lower interest rates, or qualifying for other financial perks.
3. Learn how to build credit.
Because your kids are just starting out in life, they probably don’t have any credit history. They need to learn what it takes to build a positive credit history, such as making credit card and loan payments on time every month and keeping credit balances below 30% of available credit.
Typically, kids must be at least 18 years old to open a credit card account and begin building their own credit history. However, a parent can add a teenager as an authorized user to the parent’s credit card account so they can start building credit history at an earlier age.
4. Understand how to use credit responsibly.
Just because a child turns 18 and qualifies for a credit card doesn’t mean they’re ready to start using credit. Make sure your kids know how to use credit responsibly to avoid getting into financial difficulties. Responsible credit use means:
- Understanding any fees, due dates, and interest rates associated with a credit account, including how interest is calculated and how much you will pay over time by just making the minimum payment each month.
- Paying your monthly bill on time every month. If possible, it’s best to pay the full amount owed monthly to avoid interest charges. If that’s not possible, responsible credit users pay as much as they can but at least the minimum payment every month.
- Keeping balances below the credit limit. The credit bureaus track your credit utilization ratio, or the percentage of total available credit that you’re currently using. It’s recommended to use no more than 30% of your credit limit.
5. Know how to monitor your credit.
Finally, your kids will need to know how to track their credit history and accounts over time. Credit errors are common and can be a sign of fraudulent activity. ScoreSense® provides updated credit scores and reports from all three bureaus on a monthly basis, as well as credit insights showing the factors that are affecting your credit, along with credit alerts to let you know about any reported changes. If you’re not a member, try a 7-day trial now.
