As a parent, it’s important to teach your kids the right financial lessons as they grow up. Having a good understanding of concepts like saving, budgeting, and spending can help teenagers handle the financial responsibilities that come with independence. In addition, proper financial education can help them avoid common money problems such as debt.
According to the Consumer Financial Protection Bureau, children as young as three years old can begin learning about finances through simple conversations, children’s books, and fun educational activities. This can build a strong foundation to help them understand complex financial concepts as they grow older.
In 2022, less than half of U.S. states (23) required high schools to teach financial literacy. In addition, 86% of teens expressed interest in investing but more than half of them admitted they have not invested because they lack confidence in their knowledge of personal finances.
Teaching young adults about personal finance at home can support any existing knowledge taught in school. If their school does not provide personal finance courses, having at least one parent explain basic concepts can still make a difference in their financial future.
Credit card rules and student loans are fundamental topics to discuss with your teen—especially if they plan on attending college or moving away from home.
With the rising financial problems of young adults due to student loans, it’s important to educate them as much as possible so they can make better decisions about money.
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10 questions that your teen should be able to answer about credit
During their teenage years, young adults reach a mental stage that allows them to understand debt and its causes. This is also an ideal time to prepare them for the financial responsibilities they will face in college. If student loans are imminent in their future, it’s essential to ensure they understand credit management.
As part of the lesson to manage debt, your teen should learn the basics about credit card debt and credit scores. To help guide you, here are the important questions that your child should be able to answer on their own.
1. What is a credit card?
A credit card is a purchasing tool that consumers can use in lieu of cash. Instead of using your money, you are using the money of the creditor. That means the amount must be paid back in full to avoid higher interest rates.
2. How can you use credit cards without ending up in too much debt?
The best tip is to avoid carrying over a balance to the next billing cycle because this will keep you from paying additional finance charges. Make sure to pay the bills in full within the grace period to avoid added payments.
3. What are interest rates and finance charges?
The interest rate is also known as an APR (Annual Percentage Rate). It is used to calculate the finance charge that will be added to the debt carried over to the next month—which is considered profit for the credit card company. If you don’t carry a balance, you won’t have to worry about this.
4. What is the ideal amount of credit cards to own?
While there is typically no one-size-fits-all rule regarding the number of credit cards you should have, students are better off only carrying one. Juggling multiple cards can make it difficult to keep up with payments, which could result in a lower credit score and additional charges.
5. How should a credit card be used?
Since teenagers typically lack experience with credit cards, encourage them to only use their cards for emergencies. If they plan to use it on unnecessary expenses, they must make sure to pay it off on time to avoid incurring additional fees.
A good rule of thumb is: if they cannot afford to pay a non-emergency expense in cash, they should not charge it. A debit card offers a good way to get your kid started with credit while keeping them out of debt. The amount they can charge is determined by how much you upload to the card.
6. When a credit card debt is paid off, should it be closed?
It makes sense to close a credit line you’ve paid off, but it could lower your credit score. Unless closing it is necessary, you should keep your card and practice credit management to keep it from accumulating debt.
7. What is a credit score?
A credit score is a number calculated to measure your creditworthiness—it speaks of your credit management behavior. If you have a bad record of payments, you will likely have a low credit score. This is computed based on five factors: your payment history, debt amount, credit history, type of debts, and new accounts.
8. How can I view my credit score?
You can obtain your credit report from any of the three major credit bureaus: Equifax, TransUnion, and Experian. You can also get a free copy from the Annual Credit Report website. Once you have downloaded the most current copy, you can use a free credit score calculator found online.
This is the cost-free way to go about it. Of course, you can order your credit score from the three major credit bureaus for a fee but, you are entitled to a free report once a year from all three.
9. Why is a credit score important?
A credit score can influence the interest rate that will be imposed on the future loans a consumer will have. A good score will provide access to low interest on a home or car loan. It can even help them get a good job, rent an apartment, and even low premiums on insurance. Know what this score is all about because what you don’t know about your credit score can hurt you.
10. What is a good credit score?
This will depend on the company that is computing it. FICO and VantageScore, two of the most common credit score companies, have a range of 300 to 850—a score of 750 and above is considered good Make sure you know where the credit score is being computed to understand what they consider a good credit score.
How to prepare your incoming college student for debt situations
The best way to protect your teenager from a financial future filled with debt is by educating them – especially about credit management.
Student loan debt can take a psychological toll on college students, which can affect their studies and day-to-day life. A survey from ELVTR, an online education program, discovered that over half of the borrowers faced mental health challenges because of their debt. In addition, 56% said they dealt with anxiety and about a third suffered from depression.
Unfortunately, many students borrow blindly and are unaware of the impact student loans can have on their life. In some cases, school counselors may not provide them with a complete overview of the situation. Therefore, it’s important for parents to educate their children on debt and how it can be avoided. Make sure to set a good example by practicing the right credit management skills yourself.
