How to explain credit to kids and teenagers

It’s bound to happen sooner or later. The kids grow up and make their own way in life. So why not start preparing them now? Talking about money with your kids can be a great way to pass on valuable habits and skills they’ll need their whole lives. 

You might not be ready to let them go just yet, but you can start sharing important lessons anytime. Exactly what you share could depend on the age or maturity of your kids. Early lessons might focus on what money is and how to earn and spend it responsibly. But as your kids grow older, you can also explore how credit works and why it’s important. Read on for some ideas about how and where to start.

When talking about credit, you could start with the big picture—why credit matters and how it can impact different aspects of life. 

For example, you could talk about how your credit history is considered when you apply to do things like buy a car, take out a loan, rent an apartment or get a job.

After discussing the importance of credit, you can cover the basics of how it works:

• Credit bureaus: Companies that collect information about your financial history. The three major credit bureaus are Experian®, Equifax® and TransUnion®. 
• Credit reports: Credit bureaus compile the information they have about you into credit reports. These are the basis for your credit scores. 
• Credit scores: A credit score is like a quick summary of your credit report. Many scores range from 300 to 850. There are many benefits of having a good credit score. It can improve your chances of getting your credit application approved, qualify you for lower interest rates, get you approved for a higher credit limit and more.  

There are lots of myths and facts around building credit. They can be confusing, particularly for young adults who don’t have experience managing bills on their own. Here are a few major points to share. 

• Credit accounts can help you establish and build credit: For this to happen, your lender needs to report the account to the credit bureaus. And you must consistently use the account responsibly. 
• Building or rebuilding credit takes time: There’s no quick way to build your credit. Instead, it’s achieved by doing things like making the required payments on your credit card and other loans on time every month. The Consumer Financial Protection Bureau (CFPB) recommends trying to make at least the minimum payments every month. 
• You don’t need a credit card balance to build credit: According to the CFPB, “Paying off your credit cards in full every month is the best way to improve a credit score or maintain a good one.”

Using credit responsibly can help your child build a good credit score over time. Examples of responsible credit use include: 

• Understanding the account’s terms: If you carefully review credit card and loan agreements, you’ll know what to expect when it comes to things like fees, interest rates and due dates. 
• Making your monthly payment in full, if possible: If you can’t manage the CFPB’s recommendation to pay your credit card bills in full each month, consider paying as much as you can but at least the minimum payment. 
• Staying below your credit limit: Your credit utilization ratio represents how much of your total available revolving credit you’re using. The CFPB recommends using no more than 30% of your credit limit. 
• Only apply for the credit you really need: Applying for too many credit cards within a short period of time could cause a drop in your score. Plus, lenders might think your financial situation has changed. 

As kids start to make and manage their own money, you can discuss ways they can track their income, expenses and credit. 

• Digital features: Some credit cards provide services that help you track, monitor and manage your finances. The Capital One Mobile app, for example, lets eligible users access statements and view transactions, customize alerts and notifications, and stay on top of your spending.*
• Credit reports: It’s a good idea to keep an eye on your credit reports. You can get free copies from each of the three major credit bureaus by visiting AnnualCreditReport.com. You can look for errors that may be hurting your credit. And you can keep an eye out for unexpected changes that could be a sign of identity theft.
• Credit scores: Your credit scores don’t actually appear on your credit reports. Depending on your lender, you may be able to find your scores by checking your statement or by signing in to your account online. You can also get your scores directly from the credit bureaus and credit-scoring companies—but you might have to pay for them. 

You’ve taken the time to explain credit basics to your child and you’re confident they understand the concept. Maybe it’s time to consider trying the real thing.

There are several ways your teen could consider building credit for the first time:

You may be able to add your teen as an authorized user on one of your credit cards. If the account activity is reported to the credit bureaus and the credit bureaus include the activity on their credit reports, responsible use could help your teen establish and build their credit history and contribute positively to yours. Negative actions, like missed payments, could hurt both of you. 

Kids typically have to be at least 18 years old to open a credit card in their own name. If they’re under 21, they’ll also have to prove they can independently make the minimum payments on the account. If they can’t, they may need a co-signer, guarantor or joint applicant who is at least 21 and has the ability to make required minimum payments on the account. 

If you think your teen is ready, you could discuss cards designed for people who are establishing credit. A student credit card, such as a student rewards credit card from Capital One, could be a good option. Some people alternatively start with a secured credit card, like the Capital One Platinum Secured card, before moving to an unsecured card.

The lessons and questions likely won’t stop once your teen has established their credit. So you can make a point of occasionally checking in to see how things are going, what’s working well and what questions they might have about credit or finances in general.