Teaching Your Child About Credit

By Eliza Daglish on May 10, 2015

If you have children, there are lots of things you need to teach them: how to get along with others, how to cross the street safely, and how to maintain a good credit score. Wait, what was that last one?

Yes, that’s right. Along with the basics of everyday life, it’s important that your kids know about credit scores and how they work. In fact, there are many facets of credit education to tackle when giving your kids a solid basis with which to understand their financial lives. Here are the basics to cover with your children before they go off to college, jobs, and life without mom and dad.

Child Credit Card

What’s a credit score? Kids should know what their credit score is, why it’s important, and where it comes from. A credit score, quite simply, is a way for a potential lender to gauge whether or not you will pay back a debt. Landlords and employers may also look at your credit score to determine whether a potential applicant is a responsible prospect.

Where does my credit score come from? Credit scores are made up of several factors, each weighted differently. The first one is payment history. This is worth the most to your credit score. Do you make all your payments on time? This is a good first step to maintaining a good credit score. The second factor is debt-to-credit ratio. That’s how much available credit you have, relative to the amount of debt you carry. Other factors include length of credit history, types of credit, and new credit applied for.

What’s an APR? An annual percentage rate is the amount of interest you’ll pay on your credit card purchases if you don’t pay them off in full each month. This is important to know, because if you carry a balance from month to month, you’ll be paying extra for each purchase you made in the past. A higher APR means more interest paid on all balances that aren’t paid off before the grace period.

What are credit card fees? No one wants to pay a fee if they don’t have to. Credit card fees include late payment fees, over-the-limit fees, foreign transaction fees, and annual fees. Some of these, like annual fees, may actually be worth paying – for example, if you have a travel rewards credit card that offers free flights and other perks.

What’s a minimum payment due? Young people may not understand that just because their credit card statement says they can pay $30 on a $300 balance, it’s not a good idea to do that. The reason, of course, is that the APR will continue to accrue on the unpaid balance. One very important point to tell your kids is that they should always strive to pay off their entire credit card balance each month, not just the minimum due.

Do I even need a credit card? With all the warnings about responsible credit card use, youngsters may wonder if they should bother to use one at all. The answer? Absolutely. Credit cards are essential tools in today’s world and an important one to build your credit portfolio.

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