How to explain credit to students and young adults

Talking about money with your kids can be a great way to pass on valuable habits and skills they’ll need their whole lives. Early lessons might focus on what money is and how to earn and spend it responsibly. And as your kids grow older, you can explain how credit works and why it’s important.

What you’ll learn:

• There are several ways to establish credit. But to build credit, it’s important to use it responsibly. 

• You could help your child establish credit by making them an authorized user on your credit card account. 

• If they’re ready for a credit card of their own, Capital One has two student cards to consider.

• New Capital One student cardholders can earn a limited-time $100 cash bonus when they spend $300 within three months of opening an account.

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 good credit scores. They 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 students and 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 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 to carry 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.

When kids start to make their own money or have student loans to manage, 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 their spending.

• Credit reports: It’s a good idea to monitor your credit reports. You can look for errors that may be hurting your credit. And watch out for unexpected changes that could be a sign of identity theft. With CreditWise from Capital One, it’s free and easy to access your credit score and credit report anytime. You can also get free copies from each of the three major credit bureaus by visiting AnnualCreditReport.com. 

• 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 use CreditWise.

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.

Here are a couple of ways your teen could consider building credit for the first time.

Student credit cards are designed for people who have limited or no previous credit experience. And if they’re like Capital One student cards, they’ll have tailored benefits, bonuses and rewards. 

In fact, Capital One has two student credit cards: Savor Student and Quicksilver Student. They’re both cash back cards with digital tools and security features. 

• The Savor Student card offers unlimited 3% cash back at grocery stores and on dining, entertainment and popular streaming services, plus 1% cash back on all other purchases. 

• The Quicksilver Student card offers unlimited 1.5% cash back on every purchase, every day. 

And for a limited time, new cardholders can earn $100 by spending $300 within three months of opening an account.

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 who is at least 21 and can make required minimum payments on the account if necessary. It may help to know that many credit card issuers don’t allow co-signers.

You may be able to add your child 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 child establish and build their credit history and contribute positively to yours. Negative actions, like missed payments, could hurt you both.

There’s no right time to explain credit to kids. But you can weave teachable moments into everyday situations. That way, your child might gradually understand the importance of credit to so many aspects of life. And when the time comes for them to own their own credit card, they’re ready to use it responsibly.