The What, Why and How of Teaching Children About Credit Reports
A popular viral Facebook post asks parents if schools should teach kids financial literacy. It’s a good question. The fact is that few schools teach kids basic facts about credit — simple things like how to get a credit report, how to improve their credit scores, or even why credit scores matter. It’s also a topic that resonates deeply. Teaching your children about credit — along with simple steps that will help them start adulthood with good credit scores — is one of the best ways to provide them with the tools to live their best lives.
How Do You Explain Credit to a Child?
The very idea of trying to explain how credit works to a child can seem overwhelming. Finance companies invested a lot in making the whole process of borrowing money mysterious, to the point the government established the Consumer Financial Protection Bureau to help consumers understand and use credit cards, loans and other financial instruments. The CFPB has devoted an entire section of their website — Money As You Grow — to helping parents explain credit and finances to their kids. It’s chock full of developmentally appropriate tips, activities, and advice for parents and caregivers.
At this age, kids are still learning about money in general. Mac Gardner, a Certified Financial Planner who wrote The Four Money Bears, a book about money for kids, talks about teaching kids the four things you can do with money — spend it, save it, invest it, or give it away. He told CNBC, “If every child could understand from an early age what their options are with money, then 15 years from now, they might make different choices. Conversations about credit don’t always have to be about dollars and cents. This is an excellent time to talk about other money management skills, like savings, self-control and making decisions.
- When you pay with a credit card, say something like, “When I pay for something with my credit card, the store tells the credit card company how much I’m spending. At the end of the month, the company sends me a bill and I pay it all at once.”
- Help them understand that you are spending money when you pay with credit by talking about how many dollars, nickels, dimes, and quarters you just spent with your card.
- Model good borrowing behavior. You might, for example, borrow five dollars from a friend, tell them when you’ll pay it back, then follow up by paying it back on time, explaining what you’re doing to your preschooler.
At this age, kids are old enough to understand the concept of borrowing and ready to learn about some of the finer points on how to make smart money decisions. This is a good time to start explaining the cost of borrowing, as well as when and why you might choose to borrow money rather than saving for something you want.
- Explain that when you use your credit card, you are borrowing money you will have to repay.
- Introduce the concept of interest as paying someone for the privilege of using their money for a little while.
- Have conversations about the ads you see on television, in newspapers, and in other places, with special offers, and discuss how you decide if it’s a fair offer.
- Help them set up a budget to save for something they want.
Teenagers and Young Adults
By the time they reach their teens, your kids are ready to start making some of their own financial decisions. You can help them make sound decisions and prepare for getting their first credit card at age 18 in several ways.
- Set up a prepaid debit card for them and use it for their allowance, if you give one. Show them how to monitor their spending and how to use any money management tools provided — balance notifications, for example.
- Add them as an authorized user on one of your credit accounts. Going over the billing statement together each month gives you opportunities to teach them more about how borrowing works..
- Have more in-depth conversations about credit and loans as you review student loans, car loans, and other credit decisions they may have to make soon.
When Should You Teach Children About Credit Reports?
There’s no “right age” to talk to your kids about credit reports, as long as the information you provide is developmentally appropriate. Just as you can fit teaching about credit cards into everyday conversation, you can use teachable moments to mention credit reports. With younger children, you can simply say that when you want to borrow money, the lender will ask for a credit report, which tells them if you are good at paying your bills on time.
By the time kids are in their teens, though, they should be ready to learn more about the nitty-gritty details. Before they get their first credit card, they should understand the consequences of a poor credit report, and the rewards of a high credit score. Historically, credit card and loan companies use your credit report to determine whether they’ll lend to you and what interest rate they’ll charge. More and more, though, your credit report can decide whether or not you get that job you want or the apartment you have your heart set on.
One easy way to explain credit reports to a teen is to go over your credit report with them. While you can request your credit report from each of the three major credit reporting companies each year, some credit monitoring companies make it easy to get — and understand — your credit reports. Here’s how to get your credit report, along with more information about what’s in it, and how it’s generated.
How Do You Build Your Child’s Credit History?
Children under 18 generally do not have a credit history, which means they start their credit journey with a disadvantage. There are some things you can do to give your child a boost when they’re ready to apply for their first credit card, apartment, or car loan.
- Request your child’s credit report to make sure they’re starting with a clean slate.
- If everything is OK, add your child as an authorized user on one of your credit accounts as soon as they are old enough. You carry the risk — it’s your credit that will be dinged if the bill isn’t paid on time — but the credit card’s history may report to the child’s credit profile.
- Co-sign a loan or lease for them. You can use your good credit to help your 16- or 17-year-old secure a used car loan or lease an apartment.
- Help them save for — or set up for them — a secured credit card as soon as they turn 18. The right secured credit card will report on-time payments, balance and other important information to all three credit bureaus.
- Help them comparison shop for the best student credit card, which are specially designed for young adults with little or no credit history.
Can Someone Use a Child’s Social Security Card for Credit?
The simple answer is no — it’s illegal, but that doesn’t mean it doesn’t happen. According to the CFPB, about 2.5% of U.S. households with a child under 18 have experienced child identity fraud. A child may also have a credit report if they have a name similar to an adult or because they’re an authorized user or joint account holder on an adult’s account. If your child has a credit history with mistakes on it, or you suspect identity theft, you should dispute the information. Here’s how and when to dispute credit reports.
What Can You Do When Your Child Uses Your Credit Card?
What if your child uses your credit card without your permission, though? If your child is not an authorized user, you can take steps to not only have the charges reversed and prevent the credit card company from reporting late payments while you dispute the charges.
- Contact the merchant, who may have a policy allowing purchases to be canceled within a certain time frame.
- Notify the credit card issuer as soon as possible about the fraudulent activity. The Fair Credit Billing Act requires credit card companies to promptly respond to consumer billing complaints and promptly investigate them. It also prohibits them from filing adverse reports with the credit bureaus until the investigation is complete. If you find the disputed charges on your credit report, you can request that the credit bureaus investigate and remove those items from your report.
- File a report with the FTC.
Teaching your kids about building and maintaining good credit is one of the most important things you can do to start them off on a concrete financial path as adults. By equipping them with the right tools and knowledge, you’ll be preparing them to build and live their best lives.