Teaching your kids the basics about credit

What do you do when your 13-year-old asks for a credit card?

On one hand, you might feel good that she's paying enough attention to family finances to ask that question.

On the other hand, you could think, "Uh-oh. I've still got a lot more work to do to teach her about borrowing and credit cards.”

Teach them what credit is and how it works.

Today, she may think of a credit card as a free pass to buying. It's of course anything but that. A credit card is a loan — specifically a revolving line of credit that has a borrowing limit, an annual percentage rate (APR) and typically a minimum required monthly payment. The amount of that limit and the size of that APR is generally based on the cardholders' creditworthiness, which includes their credit score, credit history, debt-to-income ratio and other factors. Other types of loans are also based on these factors.

It's helpful to give kids age-appropriate money lessons, building up their knowledge and perspective well before they hit milestones like their first paycheck, their first car and their first credit card.

Talking credit with kids in elementary and middle school

1. Start with exposure. Show your children how many credit cards you carry in your wallet, what you use them for, how to use different types of payment devices, such as a physical card or digital wallet, and how you keep your account numbers safe.
2. Talk about saving. The “three jars” method of budgeting is a simple way to show kids that income shouldn't be spent the moment you receive it. In this method, money typically earned by kids like allowance, gifts or pay from activities like yard sales or pet sitting, is separated into categories. Some families choose spend, save and donate; others choose spend, save for short-term goals, and invest for long-term goals. Saving is closely related to lessons about how to use credit, because having adequate savings can prevent having to turn to credit cards for emergencies or large purchases.
3. Discuss spending. Which types of purchases do you make with credit cards or loans? When do you use cash, debit card or electronic transfer from a deposit account?

Practice exercise:

Simulate credit card purchasing by lending your child a small amount of money to make a purchase, and then charging them interest if they don't pay the amount back by a certain time.

Talking credit with kids in high school

1. Pull your credit report and talk about what information it contains and how that information relates to your credit score. Compare the APRs you're carrying on secured debt like home and auto, and unsecured debt like credit cards and personal loans.
2. If your teen has established credit, pull their report and compare it to yours. Ideally, theirs shouldn't exist yet. But it might if, for example, you've added them as an authorized user to your credit card. This is a great visualization of the "clean slate" that teens start with as borrowers. It can also be a way to catch fraud or inaccurate information attached to your teen's identity.
3. Show your teen one of your credit cards statements. Pay particular attention to the table showing how long it would take to pay back the balance by paying only the minimum required payment. If you have other loan schedules, such as a mortgage or car loan, pull those out and review them, as well.

Practice exercise:

Set a family financial goal, such as a vacation, home improvement or new electronics. Have your teen create a budget for the goal, and a plan to pay for that goal using a mix of current savings and credit cards versus current savings and future savings. Which path is better? What other changes can you make to the plan to reach the goal? Examples include cutting expenses to boost savings, finding a short-term job to boost income or choosing a more economical vacation.

Talking credit with kids in college or young adulthood

1. Share stories of how you managed credit cards in young adulthood. Stories of mistakes you made could be especially helpful.
2. Collect credit card offers you find online or in your mailbox. Ask your teen to read through them and observe the strengths and weaknesses of each offer. Talk about how to choose a credit card and how many credit cards a person really needs.
3. For college students using financial aid and student loans to pay for tuition and other costs, involve your student in all steps of the process, from filling out the FAFSA and reviewing annual financial aid award letters to choosing what aid to accept and reviewing the terms of the loans. Like the vacation practice exercise, talk about how different choices can get you to your goal of a college degree by borrowing the cost of tuition from a lender.

Practice exercise:

Try role playing a difficult conversation about credit cards or other debt. Ask your young adult to pretend they have just seen that their credit score has dropped, and that it was not due to fraud or error, but overspending and missing payments. Have them imagine and share with you what they'd say to you or their partner if facing this crisis. Walk through the steps they might want to take to improve their credit score and pay off the outstanding debt.

What to do – and not do – with kids and credit

Parents and guardians can do a lot to help kids learn about credit scores, credit reports, using credit cards responsibly and borrowing wisely for milestone purchases.

DO model good practices yourself and make them visible to your kids.
DON'T enable irresponsible practices of friends and family, either by cosigning loans or opening joint accounts with those who have insufficient credit health to borrow on their own.

DO help your child build a budget and personal savings.
DON'T pay for everything your child wants. Decide what needs you'll pay for and set a limit that fits your family's budget. Then ask them to pay for wants beyond that using their allowance, gifts and income from working.

DO find safe ways for your kids to build credit. Adding them as an authorized user on your credit cards may help set a good foundation for their own credit history.
DON'T co-sign a credit card for your kids when they're old enough to apply. This could jeopardize your good credit standing, or worse in some cases, your relationship.

DO create a safe space to talk about money and answer questions. Kids and families run into added stress when money is a taboo subject. You should be able to talk about money on a “no-fault” basis.
DON'T hesitate to seek out trustworthy, expert help when you need more information and guidance. Good sources are USAA education resources, a not-for-profit credit counselor, or the Consumer Financial Protection Bureau website^{See note1}.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.