Your teens probably think that they know everything and also likely tell you so daily.  However, it’s a safe bet your kids haven’t learned all they need to know about a vitally important topic: credit.  Here’s what you need to make sure your teenagers understand about credit.

They’re Probably Not Learning About Credit at School…or Home

A recent NextGen study found that only 1 in 6 high school students are required to take any classes on personal finance in the U.S. Combine that with the two thirds of parents uncomfortable with “the money talk” that T. Rowe Price found in their survey and you’ve got a dangerous recipe for credit ignorance.

Why is it so hard to talk about money with our kids? It may be partly because parents aren’t confident in their own financial situation.  When 4 in 10 adults can’t find the resources to pay a $400 bill it’s understandable that it can be hard to teach lessons that haven’t been learnt. If you don’t want your children to repeat some of the same mistakes you did, the single best thing you can do is buck up and have an honest conversation about credit and money.

There might be a silver lining in the financial mistakes you’ve made: You may have a prime example of “what not to do” when it comes to credit. If you went nuts with your first credit card and spent years paying it back, your negative experience can become a lesson for your kids.

Credit Lessons Teens May Need to Unlearn

Once you dig in, you may find that even teens who learned about credit in school may have info that is either incomplete or just plain wrong. While teaching kids not to spend more than they earn is a good thing, some financial literacy programs go too far in the other direction with scare tactics about irresponsible debt.

For instance, my high schooler learned that having more than one or two lines of credit was dangerous, which is patently untrue. Carrying balances on high interest credit cards is dangerous, but having a couple of credit cards you pay monthly plus a low interest loan on a car that gets you to work or class can be a responsible choice.

How to Get a Winning Credit Score

Teens are used to playing games and a handy way to teach them to win at the game of life is to help them understand what a good credit score actually is. Even more important than understanding what is a good number is learning how that number is calculated. In general, here are the five categories that add up to winning credit:

  • Payment History 35% Win by paying your bills on time
  • Amounts Owed 30%: Win by borrowing a low amount compared to your total lines of credit, also known as credit utilization
  • Length of Credit History 15%: Win by keeping at least some accounts open for a long time
  • New Credit 10%: Win by not applying for too much new credit too often
  • Credit Mix 10%: Win by having a balance between home loans, car loans, credit cards and other types of debt

If your teen does better with concrete examples than percentages, you can use a calculator to show your teen the exact penalty charged for bad credit.  For instance, the interest on a car loan for someone with excellent credit averages 3.23% according to Experian. For bad credit, the same car loan could cost up to 11.35%.

For a $20,000, five year car loan, that’s the difference between paying $370.46 monthly ($23,227 over the course of five years) and paying $449.31 monthly ($27,958.37 over the course of five years). :

The difference of $79 per month for a car payment is easy for any teen to understand, especially when you can easily see how it adds up to over $4,700 in unnecessary charges if credit is properly kept in check. You can further help drive this home to your teen by having them relate the cost difference to how many hours of work they would need to do to cover the increased cost.

Jump Start Your Teen’s Credit Journey With Authorized User Cards

One way to give your kids credit with training wheels is to give them authorized user card from one of your existing credit card accounts. By doing so, your kids can get a jumpstart on building good credit by allowing them to inherit the history of your account. However, if you miss a payment or have high utilization on that account, your child will inherit that negative information as well, so make sure that you have a good hold on your credit before you try to help your kid out in this way.

If you actually give the card to your child for their use, keep in mind that you’re on the hook for every charge they make, so be sure you’re comfortable with your teen’s level of self-discipline. The last thing you need is hundreds of dollars in bills because your kid decided to buy pizza for the entire track team.

American Express allows authorized users from the age of 13. Perhaps the best part about American Express’ authorized user cards is the ability to set limits on each card, which puts a guardrail in place against your teen’s credit card mishaps.

Chase and Citi do not have an age requirement for authorized user cards, so either could be another viable choice for your tween or younger kids. However, banks besides American Express do not allow limits on authorized user cards, so tread carefully if you have a high credit limit. One workaround around this is to designate a card account that only your teen uses, then set a low limit on the entire card account.

Consider What Your Teen Might Need From a Credit Card

When thinking about which authorized user card to get for your teen, it’s a good idea to think about the kinds of situations that might require assistance a credit card can provide. For instance, roadside assistance came in handy when my son ran down our car battery charging his cell phone. His Chase Sapphire Reserve® authorized user card came to the rescue with its roadside assistance benefit and it was less than 40 minutes from the “click” of a dead battery to the “vroom” of a ready-to-go engine.

Another example: If a study abroad or foreign gap year is in your teen’s future (once we can all safely travel again), you’ll want to make sure your child is carrying a credit card without foreign transaction fees. Many no annual fee cards have pesky foreign transaction fees that can add up to 3% to the cost of every single purchase overseas.

Debit Cards Are Important, Too

You might also want to think about which debit cards are most suited for your teen. The SoFi debit card, for instance, rebates ATM fees worldwide. That could come in handy both if your teen goes away to college,  studies abroad or takes a gap year. A joint checking account with a debit card could be the most convenient way for you to help your teen manage their finances as you can deposit funds your kid can access right away.

However, you need to make sure that your teen understands that when the checking account is empty, the debit card stops working.  A debit card might look like a credit card, but it definitely does not function as one in a pinch.

A Secured Credit Card Might Make Sense

If you know your teen and want to let them test out credit on their own, there is a type of credit card an under-21 without income will be more likely to qualify for without your help: a secured credit card.  The Fair Credit Act of 2009 solved the problem of credit card abuse running rampant on college campuses by preventing those under 21 from applying for a credit card unless they had income or a co-signer.

A secured credit card could be a work-around as the card requires a cash deposit and only issues a credit line that matches the amount of the deposit. Proof of income may still be required but under 21s are more likely to be approved for a card that requires some skin in the game. Secured cards usually still report to credit bureaus and allow a path to building credit and eventually an unsecured credit card.

Credit Cards for College Students

If your student has income or you are willing to co-sign, another type of credit card to look into is the student credit card. Student credit cards usually come with looser credit requirements and have lower limits than standard credit cards so even a student with a part-time job can qualify. Once your student graduates from college, he may also graduate from a student card to a card with better terms. Before applying for a student credit card, be sure to make sure the bank you are considering accepts co-signers if you are choosing to go that route.

Bottom Line

You can’t rely on high school to teach your teen about credit. You have to step up and take charge so your kids are ready and able to responsibly use credit cards and other types of credit as they move into their adult lives.

Credit is a tool, like any other. Used to build a house, a hammer is effective and harmless. Used incorrectly, that same hammer can be deadly. Credit used responsibly can help build a successful future, or improperly used can destroy one.