Teaching kids about credit: 7 important lessons

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.

Here are seven key concepts you can teach your kids about credit.

What you’ll learn:

• When teaching kids about credit, some key topics to cover include what it means to borrow money, why credit is important throughout life, what you can do to build credit and how to use credit 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.

It might seem obvious, but when the time comes to teach your kids about credit, it may be helpful to start with the basics of what credit is. Try incorporating the difference between credit and debit into your explanation and ensure they understand that credit cards and other types of credit aren’t free money. Another key concept to discuss here is interest and how much it can add up over time.

Another part of the big picture to teach is why credit is important and how it can impact different aspects of life. 

For example, you could talk about how your credit history may be 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 credit scores and how they’re calculated. You can explain these three basic concepts:

• Credit bureaus: The three major credit bureaus are Equifax®, Experian® and TransUnion®. They collect information about your financial history.

• 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 credit. Instead, it’s achieved by doing things like making the required payments on credit cards 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.”

Teaching the importance of personal responsibility with credit accounts 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. 

• Paying on time: Stress the importance of paying credit accounts on time, every time. Late or missing payments could not only incur fees but also hurt credit scores.

• 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 scores 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 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.

After you’ve explained credit basics to your child and you’re confident they understand the core concepts, maybe it’s time to consider taking the first steps to establish credit.

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

• Apply for a student credit card. Student credit cards are designed for people with limited or no previous credit experience. And they may have tailored benefits, bonuses and rewards. Capital One has two student credit cards: Savor Student and Quicksilver Student. They’re both cash back cards and come with a variety of digital tools and security features. 

• Apply for a secured credit card. Another option for accessing credit is to apply for a secured credit card. Secured cards require a security deposit up front, which often makes them easier to qualify for than traditional cards.

• Become an authorized user. 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 credit reports, responsible use could help your child establish and build their credit history. But negative actions, like missed payments, could hurt credit scores for 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 and responsible use when the time comes for them to have their own credit card.

And when that time does come, your child can see if they’ll be approved for a Capital One credit card with 100% certainty—with no harm to their credit scores.