How to Teach Teens About Good Credit

When it comes to handling money, most teens have very little experience. Parents can’t protect them forever from making mistakes, but teaching them about the pitfalls of bad credit can keep them from getting ensnared in a financial trap. There are several important tips a parent should pass along to their teen children about gaining good credit. Teens can be especially susceptible to impulse buys. Talking to them early about the importance of money management can help them make good financial decisions later in life.

  • Earning – Simply handing money over to a teen child will teach them nothing about the value of currency. Once they are old enough, encourage them to seek a part-time or summer job. Select a few expenses, such as gas or evenings out with friends that they will be responsible to pay for themselves. Bailing them out periodically might be okay, but if they are consistently coming up short it could be time to have a refresher talk. If this behavior isn’t nipped in the bud, it could lead to overspending problems later resulting in a dependence on using credit.
  • Create a budget – There are few things that can help anyone, especially a teenager, learn more about the flow of money than a budget. Budgets can be helpful while planning for long- and short-term goals. It might be helpful to share the family budget with the teen and sit them down and explain the process of monitoring income, paying monthly bills and deciding what “extras” can be afforded from time to time. Not only will they learn to budget their money, they will begin to learn about some of the sacrifices their parents have made for them.
  • Differences in credit – Teach the teenager about the difference between good credit and bad credit decisions. Good credit is used to make a purchase that is a good investment, such as a new home, a college education or perhaps starting a business. Bad credit usually includes purchases made with a credit card. Explain how interest rates work and what ways they can impact finances.
  • Establish good credit – While using credit cards is best avoided if possible, establishing a good credit rating can help a teen. Since they are unlikely to have much experience using a card, and should not be left on their own to develop their credit rating, a parent can help them out by securing a card in their name. Don’t give them access to it, but making a small monthly purchase and then paying it off immediately will give them a leg up on others their age.

Teaching teens about good credit isn’t exactly high up on the list of big talks to have with children but it’s a discussion that needs to be had sooner rather than later. They might not like it now, but they’ll be glad later in life when they’re not mired in debt.

This is a guest post from Katherine Watkins, who thinks teens should learn about managing their finances as soon as they are old enough to start earning money. Katherine writes for a website that provides information on HELOC loans and offers some useful home equity loan calculators for homeowners looking to borrow money.

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