1. Teaching Financial Literacy to Teens: Introduction
  2. Teaching Financial Literacy to Teens: Making Money
  3. Teaching Financial Literacy to Teens: Budgeting
  4. Teaching Financial Literacy to Teens: Credit and Debt
  5. Teaching Financial Literacy to Teens: Cars and College
  6. Teaching Financial Literacy to Teens: Account Reconciliation
  7. Teaching Financial Literacy to Teens: Investing
  8. Teaching Financial Literacy to Teens: Moving Out
  9. Teaching Financial Literacy to Teens: Conclusion

It is important to teach teens about credit so they can make good financial decisions and avoid debt problems – now and in the future. Credit is the ability to borrow money: When you borrow money on credit, you get a loan and promise to pay it back with a little extra (interest). Having good credit can make it easier to do things such as:

  • Avoid security deposits on utilities.
  • Borrow money.
  • Enlist in the military.
  • Get a job.
  • Get approved for a credit card.
  • Get better car insurance rates.
  • Get better interest rates on credit cards and loans.
  • Qualify for a car loan.
  • Rent an apartment or house.

Credit Scores

A person's creditworthiness is typically measured with a credit score. Your credit score affects your ability to qualify for different types of credit and varying interest rates. In general, the higher your credit score, the better your loan terms.

The most common credit score is the FICO score, named after software developer Fair Isaac and Corporation. A person's FICO scores are provided to lenders by the three major credit reporting agencies – Experian, TransUnion and Equifax – to help lenders evaluate the risks of extending credit or loaning money to people. Lenders typically review the Four Cs when deciding to grant a loan:

  • Capacity – your present and future ability to meet your payment obligations
  • Capital – the value of your assets and your net worth
  • Character – your payment history
  • Collateral – the property or assets that will secure the loan

When evaluating the Four Cs, the loan officer may ask questions such as:

  • Are you employed? How much money do you earn each month?
  • What are your monthly expenses?
  • How much money do you have in bank accounts?
  • Have you had credit in the past?
  • How many credit cards do you have?
  • What collateral can you offer?

Unfortunately, we don't start with a clean slate as far as credit scores are concerned. You have to earn a good number, and it takes time. Even when all other factors remain the same, a younger person will likely have a lower credit score than an older person. That's because the length of a credit history accounts for 15% of the credit score. A teen or young adult can be at a disadvantage simply because he or she doesn’t have the depth or length of credit history.

FICO weighs five factors to calculate your FICO credit score:

  1. 35%: payment history
  2. 30%: amounts owed
  3. 15%: length of credit history
  4. 10%: new credit and recently opened accounts
  5. 10%: types of credit in use

How Teens Can Build Credit

The most important thing you can do to help your child build credit is to teach him or her to manage money responsibly. Those skills and habits go a long way towards reaching a good credit score. There are a few ways to help your teen build credit:

  • Add your child as an authorized user or a joint account holder or on your credit card. Of course, for this to work, you have to pay the credit card bills on time; otherwise, you will end up hurting your child's credit.
  • Teach your children to use credit responsibly, even before they have their own credit card. For example, as an authorized user on your account, your child should avoid charging more than he or she can comfortably pay off in full each month, and balances should be kept well below the credit limit.
  • Some 18-year-olds can get credit cards, but most need an adult cosigner until they hit 21. They’ll need a steady source of income (allowance doesn't count) to prove they can pay off the debt. Instruct your teen to avoid applying for multiple cards (even if the deals look great) – doing so can lower your score dramatically since you’ll appear desperate for credit.
  • Consider retail and gas cards since they are typically easier to get approval for than a Visa or MasterCard. Be sure to ask if the card requires payment in full each month or if it allows minimum payments. If the card must be paid in full each month, it may not be reported as revolving, and therefore will not help your teen's credit (encourage your child to pay off in full each month even if it’s not required).
  • Make sure your teen pays all his or her bills on time – every time.

It’s important to note that most prepaid credit cards and debit cards won’t help your teen build credit. Read the fine print for details. (For related reading, see Start Building Solid Credit at a Young Age.)


Teaching Financial Literacy to Teens: Cars and College
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