In the grand scheme of US and world history, the concept of credit scores and reports is very new. Credit scores first entered the world in 1989, and have had a massive impact on our society. It affects what loans you can get, what credit cards you can be approved for, and can even determine what apartments you can rent or what jobs you can get. 

Yet, credit scores are rarely taught about in school. Many americans don’t understand what impacts their credit score and view it as a number out of their control. Having a better understanding of what affects your credit score and how to read a credit report can lead to higher scores and more financial responsibility.

If you have children, you need to teach them about credit, credit scores, and reports. We’ve got some ideas on how to accomplish this.
 

Explain What a Credit Card Is

A good starting point for teaching teens about credit is to start with credit cards. They may have seen you use credit cards and know they are used for making purchases, but do they know the ins and outs of how they work?

Start by teaching them how credit cards are different from a debit or gift card. The biggest concept to understand is that a credit card makes purchases on borrowed money and you have to pay back the money later. If you fail to pay it back during the month, interest is added to the total amount that needs to be paid.

Make sure they understand that the money is loaned and there is a limit to how much you can put on a credit card. This concept is important to the next item you’ll teach.
 

Who Would You Trust With Your Money

Have your child make a list of their friends, family and people they know. Be sure to include a large range of people, from people they know really well to others they don’t know. 

Once you have a good list, complete this exercise: Tell them they have $10,000, and each person on their list has come to them asking to borrow money. Your teen gets to choose how much money they lend to each person, but the total can’t go over $10,000. Finally, explain that there is always the risk they won’t pay you back and you’ll lose out on the money.

After this step is done, ask them why they made the choices they made. Likely, they’ll explain that people they know and trust to pay them back received higher amounts, while those they didn’t trust or believe in received lower amounts. Ask in depth questions about why they trust certain people over others.
 

Credit Scores are Trust Scores

After doing the above exercise, you can explain how credit score and reports fit into lending money. Banks and lenders can’t get to know each person on an individual basis to know if they can trust them or not, so they use other methods. The main way banks determine this trust is through credit scores.

Credit scores come from credit reports created by businesses called credit bureaus. Credit reports are basically a history of everything you do with loans and credit. Many things get reported to the credit bureaus that go on credit reports like: applying for a credit card, paying rent or bills, making or missing a payment on a loan, and more!

Then, a credit score is created from the credit report by giving certain items more importance. Things like having a long history of not missing payments, having a credit card and using it responsibly for a long time all help build a high credit score.

High credit scores indicate someone who is responsible with their bills and credit. Lenders use this score to help determine if they will lend someone money, along with how much money to lend them.
 

Teaching How to Get a High Credit Score

Before becoming an adult, your teenagers should know the basics of getting a good credit score. Especially if they don’t have any credit history, these first steps can make a world of difference. 

A great first step is to get them a credit card. Depending on where you get the card and the circumstances, you might need to co-sign on the card, but getting them a card with a low limit is a good start.

Then, teach them how to use the credit card with some of their regular expenses. Tell them to only use the card on things they're already buying and know they can afford. Things like a fast food lunch, gas for a car, or a few items online they would just put on their debit card are all good ways to start out. Then, at the end of the month, show them how to pay off their credit card.

Pioneer’s VISA credit card is a great starter credit card for teens and young adults. You can actively monitor their credit score in their myPioneer account, control the card through the myPioneer Card Companion app, and with every purchase they earn Rewards! points. 
 

Getting That First Loan

At some point, your teen is going to need a loan. It might be to help pay for school, to buy their first car, or some other expense. You should help prepare them for that by teaching them about loans and also have a strong credit score. 

If your child needs a car, either to go to school or work, Pioneer’s First Time Auto Buyer Loan is a great first loan for them. We do a Credit Checkup with them, to help them better understand their current credit situation, and help them get a loan to buy their first car. 

Learn More about First Time Auto Buyer Loan