Financial Lessons from the Mall

Financial Lessons from the Mall: Teaching Your Teens About Credit

By Jessica Kmetty

I was in Kohl’s the other day with two of my sons with the intent to only purchase a few articles of clothing for my daughter, but they happened to be having some great sales so we ended up purchasing quite a few clothing items for each of my children.

The lady ringing up our items asked a question I’ve been asked at almost every department store, every time I’ve checked out. “Will you be putting all of this on your {insert name of store} card?” followed promptly by, “If you apply for a card, you can get an extra 10% off your entire purchase today.” The lady proceeded, “Don’t worry, if you don’t qualify due to your credit score, you still get the discount on today’s purchase.”

I declined the offer, turned to my teenage son, and asked what he knew about credit scores. You could hear crickets chirp. He had no idea what a credit score was, what comprised/impacted a credit score or why they are important. I used this as a teaching moment.

Thirty minutes later, he could tell you what constitutes a good score versus an excellent score, about credit card utilization ratios, the importance of timely payments, the relative value of store credit cards versus cards issued directly by lenders (e.g., Chase, Discover), and other credit factors like the age of your credit history, total number of accounts, and number of credit inquiries.

However, he asked me a question I wasn’t expecting. “Mom, what’s my credit score?” Which led to, “So if I don’t have credit until I’m 18, then does that mean I’ll have to build my own credit from scratch while I’m away at college?”

I’m a firm believer in helping my children succeed by having open dialogue, using teaching moments, and helping them make the best decisions for their future. I mean, I wouldn’t just let them fly solo and get a C or a D in their math class, so why would I expect them to go it alone on something as important as building their credit?

Here are a few tips that we’ll be using over the next several years as training wheels to help my oldest son get ready for the responsibilities associated with building his own credit in the future when the training wheels come off:

  1. Co-sign for a checking account and debit card. Parents who want to help their child build credit can co-sign for a debit card linked to their teenager’s bank account. This limits purchases to the amount in the bank account but also gives the child some freedom and independence. Talk about budgeting, go over the spending with them, discuss charges, and talk about the link between budgeting and spending.

  2. Get your teenager a credit card with a small credit limit. If you co-sign to get your teenager a credit card, set a small credit limit on the card. Help your teenager understand that they need to pay off the credit card in full each month. It’s a good time to learn good habits so that they don’t get into trouble later. Start by making just a few small purchases each month (e.g., gas, haircuts, movie tickets), that get paid off in full. Payment history has a high impact on credit scores.

  3. Consider getting them a credit card that prints their credit score right on the statement. This can help reinforce the good habits as they watch their credit score improve over time. Alternatively, you could sign them up for a free service like so that they can track their score.

  4. Consider recurring payment cards. Get another credit card in their name, and set up a single recurring bill on the card (e.g., Netflix subscription), and an automatic recurring payment every month. This card isn’t intended as a primary use card, but can show a long history over time of timely payments. This can be especially helpful in extending the average age of cards so that by the time they graduate from college or buy their first car out of college, or their first home, they have a few longer-term cards, in-good-standing with no missed payments. Ideally, you want to have 5-6 years of credit history for fair credit, 7-8 for good credit, and 9+ for excellent credit.

Giving teenagers a good understanding of the pros and cons of credit and how to use it responsibly helps them become independent but the best way to teach them is by example. If you haven’t always managed your own credit well, tell them about it, how it made you feel, what the fees were that you got hit with, and how the balance ballooned with the interest attached. Tell them that you care about them and learning how to manage their credit is a rite of passage for a young adult and you want them to have every opportunity to be successful. They will thank you later.

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The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on July 15, 2015 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.