Skip to main content

Financial Wellness

Teaching Teens About Credit: A Guide for Parents

Posted

Mother and teenaged daughter sitting on a couch. Mother has a laptop and is smiling at daughter who is looking at her smartphone.

Let's talk about something super important but often overlooked—credit. It's like a financial passport for adulthood and getting the hang of it now can make financial milestones that much smoother. As a parent guiding your teen into the world of finance, let’s explore key questions about credit and credit scores and why they are essential for your teen's future.

Explaining to Your Teen Why Credit Matters

Understanding and managing credit from a young age sets your teen up for financial success later in life. A solid credit history will ease the way for them. So why is it a big deal? When teaching teens about credit, explain that having a good credit score can mean:

  • Better chances to buy big-ticket items (think cars and houses, not just the latest gadgets).
  • Lower interest rates on loans, saving them lots of cash over time.
  • Can make them look good during some job and rental applications.

Getting Started: Help Build Your Teen’s Credit

At its bare minimum, credit is the ability to borrow money with the promise of paying it back later, usually with interest. Credit can be earned through credit cards, loans, or any situation where you receive products or services immediately and pay for them in the future. For parents and teenagers, building credit is all about showing off how responsibly you can borrow money and pay it back on time. A few ways you can help start your teen’s credit story is by:

  • Co-signing on a Small Loan: Think of this like being a superhero mentor to your sidekick. By co-signing a small, manageable loan, you give your teen a chance to learn about borrowing and repaying money responsibly. This method is a safe and effective way to introduce them to the responsibilities of handling debt while you oversee and guide their decisions.
  • Help Them Apply for a Secured Credit Card: These cards require a cash deposit that you make upfront, which typically serves as your credit limit. They’re great for teens starting out or those who need to build credit because the risk is lower due to the deposit.
  • Help Them Apply for a Credit Builder Loan: This type of loan doesn't work like a regular credit card where you can spend, pay off, and spend again. Instead, the money borrowed is held by the lender (like a bank or credit union) in a savings account. Your teen makes monthly payments on the loan, which are reported to credit bureaus to help build a good credit score. After the loan is fully paid, your teen receives the money back. This is a great way for those with little or no credit history to prove they can make payments on time

Demystifying Credit Scores: How They’re Calculated

A credit score acts like a report card for your teen’s financial history. The score ranges from 300 to 850 based on a credit report calculated by three credit bureaus – TransUnion, Experian, and Equifax. As with many scoring systems, the higher your credit score, the better it is, and the more benefits you can access down the road. Here are a few of the many factors that the credit bureaus use to calculate your score:

  • On-Time Payment History: Encourage your teen to always pay their bills on time. This is one of the easiest ways to positively influence their credit score. Whether they pay on time or late, it impacts their credit score.
  • Credit Utilization: This measures how much of your available credit you're using. It’s calculated by comparing the credit used (spent) compared to your credit limit (the most you can spend). It’s displayed as a percentage, and a high percentage could lower your score.
  • Credit History Length: Longer histories give a clearer picture of your creditworthiness and shows lenders that your teenager is reliable with money. That is why it is important to start building credit earlier.
  • New Accounts and Types of Credit: Fewer new accounts (and therefore more history), fewer credit inquiries (AKA applications), and a diverse array of credit types like loans and credit cards can also signal better financial health for your teen.

Can My Teenager Build Credit Without a Credit Card?

Yes! If your child isn’t ready for a credit card, no sweat! Credit cards are standard, and the choices are abundant, but that’s not the only way to build credit. Some newer services report regular bill payments to credit bureaus, like your phone or utilities. Plus, having them pay student loans on time in the future can also build their credit history.

The Flip Side: Risks of Misusing Credit

Credit offers many benefits, but it also comes with risks. Misusing credit can lead to serious consequences such as debt accumulation, damaging your credit score, and long-term financial struggles. For instance, consistently carrying a high balance can reduce a credit score by dozens of points, making future loans more expensive or difficult to obtain. It's crucial to teach your teen they should spend only what they have, pay their bills on time, and read the fine print to understand all aspects of their credit agreements.

When you teach your teenager how handle credit with care from the start, you’re laying the groundwork for a secure future full of potential. Credit is not just a “nice-to-have” skill or a good way to borrow—it’s the cornerstone of your financial health. For teenagers, this could be their first taste of economic independence, and for parents, it’s about the foundational credit know-how so your kids can tackle adulting like pros.

Ready to empower your teenager with financial knowledge? Begin by going over this Breakdown of a Credit Score handout together and consider exploring our range of credit cards designed for every stage of your teen’s financial growth.


Awards

St. Mary’s Bank Recognized as Top Choice by New Hampshire Union Leader Readers

Savings

What is an HSA? Understanding How Health Savings Accounts Work

St. Mary's Bank Announces 2024 Scholarship Recipients