Just like with teaching a child good manners, helping your child to develop good credit behavior takes time, patience, and reinforcement. Here are five lessons to consider teaching your child before they apply for their first credit card.
Lesson #1 – Have “The Credit Talk”
Tell it to your child straight: Credit is not free money. Let them know that irresponsible credit behavior comes at a price, specifically higher interest rates, lower credit scores, less favorable terms, late fees, and more. Stress that how they manage a credit card could affect their lifestyle and future financial options. Accentuate the positive. Explain that good credit and responsible credit behavior could open doors and present opportunities they might not otherwise get with poor credit.
Lesson #2 – Explain Credit Scores
Children of most all ages understand the concept of games and keeping score. They know that a high score is something to feel proud about and a low score means there’s room for improvement. Explain to them that a credit score is essentially a number—ranging from 300 to 850—that lets them, and others, know how they’re doing in the “game” of credit. Share your credit score with your child. If it’s not as high as you would like it to be and you’re not proud of it, explain to them why it’s important to you to improve it and how you plan to do so.
Lesson #3 – Report Cards Are Not Just for School
If your child is in school, they should understand the concept of a report card and how it reflects their performance in the classroom. Let them know that a credit report is essentially the same thing, only it paints a picture of how you’re performing in the real world when it comes to managing your credit. Explain that credit card companies, banks, and other companies share information with the three major credit bureau—Experian®, Equifax®, and TransUnion®—each of which uses this information to generate a credit report.
Pull your own credit report and use it as an example. Go over each section, including your personal information, accounts, and inquiries and talk about how it affects your family’s finances. Stress the importance of reviewing your report regularly to make sure it’s accurate and up-to-date.
Lesson #4 – More Is Not Always Better
Children often think that more of something has to be better, but it’s up to you to teach them that, when it comes to credit, this isn’t always the case. If they’re old enough to understand ratios and percentages, explain the concept of credit utilization: how much is owed in outstanding credit card balances in relation to how much available revolving credit one has. Stress that they should typically strive to keep this ratio below 30%. If your child gets an allowance, give them 30% of it to put the concept of this percentage into a tangible example they’ll better understand.
Lesson #5 – Good Credit is a Marathon, Not a Sprint
Explain to your child that practicing good credit behavior is not a temporary thing but a lifelong commitment. Emphasize how they may be able to acquire more or nicer things—homes, cars, vacations, etc.—with good credit, and that it may end up costing them less over their lifetimes because of more favorable interest rates and better terms. Let them know that better opportunities may also present themselves with good credit, such as better employment, as desirable employers may ask to review their credit report prior to offering them a job. And stress how important it is not to let up on good credit habits. Even a single late payment can lower a credit score.
By law, your child must be at least 18 years old to open their own credit card account. How many years does that leave you to teach them good credit habits and behavior? If you haven’t started yet, get started with these five valuable lessons.
The information contained in this article is for educational purposes only and is not legal advice. You should consult your own attorney or seek specific advice from a legal professional regarding your particular situation. Please understand that Experian policies change over time. Articles reflect Experian policy at the time of writing. While maintained for your information, archived articles may not reflect current Experian policy.
