How to Talk to Teens About Credit

Nov 27, 2018

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“Mom, how many credit cards do you have?”

My then 14-year-old’s expression turned to horror when I started counting and ran out of fingers and toes was memorable. “You must have terrible credit!” he exclaimed. Turns out his personal finance class had begun talking about credit and his teacher started with myth No. 1: having more than a couple of credit cards will ruin your credit.

Thus started a conversation with our teen about credit. It’s an important talk to have, especially when your kids see you handling credit in a way that probably differs from their friends’ parents or teachers’ advice. Today I want to share some tips about how to responsibly discuss credit with your kids.

Begin the Conversation Early

While kindergarten doesn’t teach kids about credit, 5 is not too early to begin discussing economic choices. The conversation might start with a weekly allowance or a piggy bank. The main things at this age are to make sure money isn’t a taboo topic and that it isn’t an infinite resource. If the kids understand that money is finite and that the ATM isn’t printing money just for you, they’re farther along than a lot of kids I have met.

Image courtesy of Getty Images / svetikd
Image courtesy of Getty Images / svetikd

Make Sure They Have Accurate Information

Just like the teacher who told my son that three is too many credit cards, kids get wrong info even from normally reliable sources. In my case, the lesson I had to teach my son was about utilization. The facts are that the number of credit cards matters much less than the debt-to-credit ratio.

Show your kids what a credit report looks like. Also show them what the ranges of “excellent,” “good” and “poor” mean in real terms. A great way to do this is a mortgage calculator. I made the table below with the FICO calculator. Someone with poor credit may pay $89,000 more for a $250,000 house. That’s real money that should impress even a semi-disinterested teen.

Screenshot via MyFico.com
Screenshot via MyFico.com

Make Sure They See the Traps as Well as the Rewards

We miles and points enthusiasts have an extra step to take when it comes to credit cards and our kids. For years, they’ve watched us reap the benefits from leveraging our credit cards. Because of this, they may have a skewed vision of the uses credit cards have in our daily lives. Show your kids how you pay off your bills each month, and show them exactly how much more you would owe if you carried a balance.

Adding on to that: If you are not paying off your balances each month, show them that, too. Explain why you are carrying a balance and how much extra you are paying for the money you have borrowed.

Help teens understand that the fancy award trip isn
Help teens understand that the fancy award trip isn’t worth it if you get caught with fees and interest

Use Your Experiences as Lessons

Sometimes your mistakes can have the silver lining of being life lessons for your kids. When I went off to college I was seduced by how easy it was to get credit cards. I ran the balances into the thousands within a few months and spent the next three years paying them off. The silver lining of my misadventure is that I understand the pitfalls of having credit when you’re not mature enough to handle it.

Know Your Kids, and Make Sure Your Kids Know Themselves

I took an informal poll of my son’s friends, asking what they knew about credit. One of my son’s friends brought up an important point: “I have no discipline so I should use debit, not credit.” The point wasn’t so much about credit, it was about self-awareness.

It’s important for kids to understand that credit cards are tools, nothing more, nothing less. If you know how to use the tools responsibly, you can use your good credit to build a foundation for a solid life: college, a home, retirement (and even some decent rewards along the way).

However, if your kid doesn’t have self-discipline, giving him a credit card is like handing an anvil to Wile E. Coyote. You just stand by and wait: Eventually he’s gonna fall off a cliff.

Kids with credit cards
(Photo by Hill Street Studios / Getty Images)

If They Are Ready, Consider Authorized User Cards

One way to help teens build credit is by using an authorized user credit card from one of your accounts. Here is a great article on authorized users. The upside to adding your child is that you are using your credit history to give your kids a leg up when they are ready to apply for their own cards. The downside is that if your kid isn’t disciplined, you could get a nasty shock come statement closing time.

One way to mitigate the chances of your kid going off the rails is to set notifications and limits for his or her purchases. You can set your account to get a text when your child spends over a certain amount. You can also establish a limit on the authorized user card with some banks, notably American Express. Some banks, like Chase, don’t have a minimum age for authorized users. Others, like American Express do have age minimums (currently 13 years with Amex).

Another way to accomplish the same result is to have an account that only your child uses. It’s still your account and your child is still an authorized user, but all spending on that card is theirs. By doing that you can set a lower credit line on the account.

Bottom Line

The bottom line is to know your teen. Some kids are ready for credit at 13, others aren’t even really ready once they are adults. By starting the conversation early and keeping an open dialogue, you can help your teen enjoy the benefits of credit cards while (hopefully) side-stepping the pitfalls.

Featured image by kizilkayaphotos / Getty Images.

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