Teaching children about credit: Why it’s important and how to start
Quick insights
- Teaching financial skills to children can help them manage credit as they grow into adults.
- When discussing credit with children, try to simplify your explanations and use familiar examples to illustrate complex concepts.
- Reviewing your own credit report with your child or adding them as an authorized user on your credit card are examples of practical educational opportunities.
As your child becomes more independent, you may wonder when to begin discussing credit with them—and how to have that conversation constructively. Credit is a topic that many struggle to understand, even as adults, which can lead to problems like high debt and low credit scores. In this article, we’ll describe some of the benefits of introducing credit to your child. We’ll also note key credit topics and offer suggestions on how to make each more approachable, including:
- What is credit?
- Types of credit
- How to use credit responsibly
- Practical credit management skills
The importance of credit education
The day when credit becomes important for your child may be approaching sooner than you think. Before you know it, your child may be ready to buy their first car, apply for a credit card or rent an apartment.
Most people don’t have a credit score until they turn 18, but some parents take steps to introduce their children to financial concepts (including credit) to help them get a head start. This could include opening a dialogue about credit or taking practical steps, such as making your child an authorized user on your credit card.
What is credit?
Explaining credit in a kid-friendly way may require simplifying the topic and using real-world examples that are familiar to them. For example: The credit system helps people establish a reputation for using borrowed money responsibly. If you lend a friend $5, it feels good if they return that money to you when they agreed to, and it may make you more comfortable lending them $10 later. The credit system works in a similar way; when adults borrow and repay on time, it can help improve their credit score and allow them to borrow more money later.
How about interest?
Because most forms of credit are repaid with interest, it’s important to include this in your discussion. Depending on your child’s math level, they may already be familiar with what interest is and how it works. In kid-friendly terms: using credit often means paying an extra percentage on top of what you borrowed (called “interest”). If you delay making payments, the interest that you owe can continue to grow over time.
Types of credit
There are different types of credit which can be used for different purposes. In these sections you will find examples of simplified language to use as inspiration to start a dialogue with your child.
Secured vs. unsecured credit
In simple terms, “secured credit” means that the lender has the right to take something back if they aren’t repaid. A mortgage is an example of this; with a home loan, the lender can take the home back and sell it if payments are not made. “Unsecured credit” means there is nothing for the lender to take back if the borrowed money isn’t repaid. As a result, money borrowed with unsecured credit often has higher interest rates to help offset the risk to the lender. Most credit cards are a form of unsecured credit.
Installment vs. revolving credit
Some forms of credit are spent once and repaid over time, and others are spent and repaid over and over. The money you borrow for a mortgage arrives as a single lump sum which is then repaid in installments over many years; this is a form of installment credit. On the other hand, a credit card is a type of revolving credit; there is a credit limit (the maximum you can spend with it) that can be spent and repaid repeatedly.
Practical lessons in credit management
In addition to opening a dialogue about credit with your child, you may want to consider some additional steps into practical credit management. A few ideas include:
- Viewing your credit history together: Looking at a parent’s credit history can help make concepts feel more real to a child learning about credit. You can either request a credit report from one or multiple credit bureaus or use a tool like Credit Journey to display recent updates to your score.
- Adding your child as an authorized user: Adding your child as an authorized user to your credit card can help them learn how to use a credit card with a parent’s close oversight and/or restrictions. As an authorized user, they may be able to begin building a credit history before turning 18.
Building credit as a young adult
Helping your child understand how to raise their credit score could help them access more financial opportunities over time. A few points to emphasize include:
- Budget: Emerging adults may struggle to understand that goods and services purchased using credit need to be repaid later. As a result, using credit requires basic financial planning and budgeting.
- Make timely payments: Making payments on time is a major factor in cultivating a strong credit score. A late payment can cause your credit score to drop and remain on your credit report as a negative mark for years.
- Monitor your credit utilization ratio: Credit utilization refers to how much of your available credit limit you use. Keeping your credit utilization relatively low (30% or lower) may help raise your score.
- Have different types of accounts: Your credit “mix,” or the variety of types of credit you use, can also impact your score. For example, a strong credit mix for one person might include having a student loan, a car loan and a credit card.
- Maintain long-term accounts: Keeping accounts open and in good standing over a long period of time can help contribute to a strong credit score.
- View your credit score regularly: Enrolling in an online credit tool, such as Chase Credit Journey®, can help you keep track of your credit score. Credit Journey® allows you to check your credit score anytime for free, even if you’re not a Chase customer.
In conclusion
Building good credit requires consistent, responsible habits over time. By teaching children the fundamentals early, adults can help empower them to make informed decisions and help avoid common credit pitfalls as they grow. Early education can help set the stage for a lifetime of healthy financial choices.
