10 Credit Management Questions Your Teen Should Understand (2023)

As a parent, it’s important to teach your kids the right financial lessons as they grow up. Having a good understanding of concepts like saving, budgeting, and spending can help teenagers handle the financial responsibilities that come with independence. In addition, proper financial education can help them avoid common money problems such as debt.

According to the Consumer Financial Protection Bureau, children as young as three years old can begin learning about finances through simple conversations, children’s books, and fun educational activities. This can build a strong foundation to help them understand complex financial concepts as they grow older.

In 2022, less than half of U.S. states (23) required high schools to teach financial literacy. In addition, 86% of teens expressed interest in investing but more than half of them admitted they have not invested because they lack confidence in their knowledge of personal finances.

Teaching young adults about personal finance at home can support any existing knowledge taught in school. If their school does not provide personal finance courses, having at least one parent explain basic concepts can still make a difference in their financial future.

Credit card rules and student loans are fundamental topics to discuss with your teen—especially if they plan on attending college or moving away from home.

With the rising financial problems of young adults due to student loans, it’s important to educate them as much as possible so they can make better decisions about money.

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10 questions that your teen should be able to answer about credit

During their teenage years, young adults reach a mental stage that allows them to understand debt and its causes. This is also an ideal time to prepare them for the financial responsibilities they will face in college. If student loans are imminent in their future, it’s essential to ensure they understand credit management.

As part of the lesson to manage debt, your teen should learn the basics about credit card debt and credit scores. To help guide you, here are the important questions that your child should be able to answer on their own.

1. What is a credit card?

A credit card is a purchasing tool that consumers can use in lieu of cash. Instead of using your money, you are using the money of the creditor. That means the amount must be paid back in full to avoid higher interest rates.

2. How can you use credit cards without ending up in too much debt?

The best tip is to avoid carrying over a balance to the next billing cycle because this will keep you from paying additional finance charges. Make sure to pay the bills in full within the grace period to avoid added payments.

3. What are interest rates and finance charges?

The interest rate is also known as an APR (Annual Percentage Rate). It is used to calculate the finance charge that will be added to the debt carried over to the next month—which is considered profit for the credit card company. If you don’t carry a balance, you won’t have to worry about this.

4. What is the ideal amount of credit cards to own?

While there is typically no one-size-fits-all rule regarding the number of credit cards you should have, students are better off only carrying one. Juggling multiple cards can make it difficult to keep up with payments, which could result in a lower credit score and additional charges.

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5. How should a credit card be used?

Since teenagers typically lack experience with credit cards, encourage them to only use their cards for emergencies. If they plan to use it on unnecessary expenses, they must make sure to pay it off on time to avoid incurring additional fees.

A good rule of thumb is: if they cannot afford to pay a non-emergency expense in cash, they should not charge it. A debit card offers a good way to get your kid started with credit while keeping them out of debt. The amount they can charge is determined by how much you upload to the card.

6. When a credit card debt is paid off, should it be closed?

It makes sense to close a credit line you’ve paid off, but it could lower your credit score. Unless closing it is necessary, you should keep your card and practice credit management to keep it from accumulating debt.

7. What is a credit score?

A credit score is a number calculated to measure your creditworthiness—it speaks of your credit management behavior. If you have a bad record of payments, you will likely have a low credit score. This is computed based on five factors: your payment history, debt amount, credit history, type of debts, and new accounts.

8. How can I view my credit score?

You can obtain your credit report from any of the three major credit bureaus: Equifax, TransUnion, and Experian. You can also get a free copy from the Annual Credit Report website. Once you have downloaded the most current copy, you can use a free credit score calculator found online.

This is the cost-free way to go about it. Of course, you can order your credit score from the three major credit bureaus for a fee but, you are entitled to a free report once a year from all three.

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9. Why is a credit score important?

A credit score can influence the interest rate that will be imposed on the future loans a consumer will have. A good score will provide access to low interest on a home or car loan. It can even help them get a good job, rent an apartment, and even low premiums on insurance. Know what this score is all about because what you don’t know about your credit score can hurt you.

10. What is a good credit score?

This will depend on the company that is computing it. FICO and VantageScore, two of the most common credit score companies, have a range of 300 to 850—a score of 750 and above is considered good Make sure you know where the credit score is being computed to understand what they consider a good credit score.

How to prepare your incoming college student for debt situations

The best way to protect your teenager from a financial future filled with debt is by educating them – especially about credit management.

Student loan debt can take a psychological toll on college students, which can affect their studies and day-to-day life. A survey from ELVTR, an online education program, discovered that over half of the borrowers faced mental health challenges because of their debt. In addition, 56% said they dealt with anxiety and about a third suffered from depression.

Unfortunately, many students borrow blindly and are unaware of the impact student loans can have on their life. In some cases, school counselors may not provide them with a complete overview of the situation. Therefore, it’s important for parents to educate their children on debt and how it can be avoided. Make sure to set a good example by practicing the right credit management skills yourself.


What are good questions about credit? ›

Frequently Asked Questions About Credit
  • What is a credit report? ...
  • What is a credit score? ...
  • How do I obtain a credit report and/or score? ...
  • How long does information remain on my credit report? ...
  • How does divorce affect my credit report and credit score? ...
  • How does bankruptcy affect my credit report and credit score?

What are good financial questions for students? ›

Personal Finance Questions
  • Do I need a budget, and how do I create one? ...
  • Do I need to file my taxes? ...
  • Can my parents still claim me as a dependent? ...
  • What does investing mean? ...
  • Do I need to think about saving for retirement now? ...
  • How do I open a checking account?
Mar 7, 2022

What are 2 ways you can start building strong credit practices as a teenager? ›

How to build credit for teens
  • Encourage your teenager to get a job. Your teen will be more invested in managing his or her money if it's hard-earned. ...
  • Open checking and savings accounts. ...
  • Consider putting one of your household bills in your teen's name. ...
  • Obtain a secured credit card.

What is the single most important thing to understand about credit scores? ›

The most important factor of your FICO® Score , used by 90% of top lenders, is your payment history, or how you've managed your credit accounts. Close behind is the amounts owed—and more specifically how much of your available credit you're using—on your credit accounts.

What are the 5 C's of credit answers? ›

Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral.

What are the 5 C's of credit important? ›

The 5 Cs are Character, Capacity, Capital, Collateral, and Conditions. The 5 Cs are factored into most lenders' risk rating and pricing models to support effective loan structures and mitigate credit risk.

What are the five key questions financial planning must answer? ›

The key questions financial planning must answer are: What specific assets must the firm obtain in order to achieve its goals?, How much additional financing will the firm need to acquire these assets?, How much financing will the firm be able to generate internally (through additional earnings), and how much must it ...

What are the three financial questions? ›

"Big Three" financial literacy questions
  • Interest Rate Question. Suppose you had $100 in a savings account and the interest rate was 2% per year. ...
  • Inflation Question. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. ...
  • Risk Diversification Question.
Dec 4, 2020

What are the basic questions of finance? ›

Top 35+ Finance Interview Questions 2023
  • What is Finance?
  • What do you understand by working capital?
  • What is a cash flow statement? Explain.
  • Can a company show positive net income and yet go bankrupt?
  • What is hedging? Explain.
  • What is preference capital?
  • What do you understand by fair value?
  • What is RAROC?

What are 5 strategies to develop and maintain good credit? ›

Establishing good credit habits is essential so that you can build and improve your credit history and credit score.
  • Pay your bills on time. ...
  • Avoid maxing out credit accounts. ...
  • Manage your debt-to-income ratio. ...
  • Contribute to an emergency fund. ...
  • Practice making payments before taking on new debt. ...
  • Monitor your credit reports.

What are 4 ways that you can build good credit? ›

How do I get and keep a good credit score?
  • Pay your loans on time, every time. ...
  • Don't get close to your credit limit. ...
  • A long credit history will help your score. ...
  • Only apply for credit that you need. ...
  • Fact-check your credit reports.
Sep 1, 2020

What are 5 ways to establish credit? ›

A credit report is a record of your credit activity and how responsibly you've paid your credit accounts over time.
  • Become an authorized user. ...
  • Consider a cosigner or co-applicant. ...
  • Apply for a college credit card. ...
  • Get a secured card or a secured loan. ...
  • Consider gas and retailer credit cards.

What are the four C's of credit? ›

What Are the Four Cs of Credit?
  • Capacity.
  • Capital.
  • Collateral.
  • Character.

What are the 5 factors that affect your credit score? ›

The 5 factors that impact your credit score
  • Payment history.
  • Amounts owed.
  • Length of credit history.
  • New credit.
  • Credit mix.
Dec 30, 2022

What are the 3 C's of credit scores and describe each one? ›

Character, capital (or collateral), and capacity make up the three C's of credit. Credit history, sufficient finances for repayment, and collateral are all factors in establishing credit. A person's character is based on their ability to pay their bills on time, which includes their past payments.

What are the five six of credit? ›


What are the 3 types of credit risk? ›

Types of Credit Risk
  • Credit default risk. Credit default risk occurs when the borrower is unable to pay the loan obligation in full or when the borrower is already 90 days past the due date of the loan repayment. ...
  • Concentration risk. ...
  • Probability of Default (POD) ...
  • Loss Given Default (LGD) ...
  • Exposure at Default (EAD)
Mar 14, 2023

What are the six sources of credit? ›

Consider the Sources of Consumer Credit
  • Commercial Banks. Commercial banks make loans to borrowers who have the capacity to repay them. ...
  • Savings and Loan Associations (S&Ls) ...
  • Credit Unions (CUs) ...
  • Consumer Finance Companies (CFCs) ...
  • Sales Finance Companies (SFCs) ...
  • Life Insurance Companies. ...
  • Pawnbrokers. ...
  • Loan Sharks.

What are the three important terms of credit? ›

Terms of credit have elaborate details like the rate of interest, principal amount, collateral details, and duration of repayment. All these terms are fixed before the credit is given to a borrower.

What is one of the 4 Cs of credit granting? ›

Standards may differ from lender to lender, but there are four core components — the four C's — that lender will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.

What is the basic credit analysis? ›

Credit analysis evaluates the riskiness of debt instruments issued by companies or entities to measure the entity's ability to meet its obligations. The credit analysis seeks to identify the appropriate level of default risk associated with investing in that particular entity.

What are the 7 key components of financial planning? ›

A good financial plan contains seven key components:
  • Budgeting and taxes.
  • Managing liquidity, or ready access to cash.
  • Financing large purchases.
  • Managing your risk.
  • Investing your money.
  • Planning for retirement and the transfer of your wealth.
  • Communication and record keeping.

What are the 7 steps components to financial planning? ›

Financial Planning Steps – From Start To Finish
  • Find An Experienced Certified Financial Planner™ Professional. ...
  • Determine Your Present Financial Situation. ...
  • Develop Financial Goals. ...
  • Identify Alternative Courses of Action. ...
  • Evaluate Alternatives. ...
  • Create and Implement Financial Plans of Action. ...
  • Reevaluate (and Revise) your Plan.

What are the 3 key financial management decisions? ›

It deals in three main dimensions of financial decisions namely, Investment decisions, Financial decisions and Dividend decisions.
  • Investment Decisions. Investment decisions refer to the decisions regarding where to invest so as to earn the highest possible returns on investment. ...
  • Financial Decisions. ...
  • Dividend Decisions.

What is the most important financial statement? ›

Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.

What are the 3 basic tools of financial statement analysis explain briefly? ›

Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques are horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years.

What is the big three and big five? ›

According to the first, there are three main factors: Extraversion, Neuroticism and Psychoticism, whereas the Big Five theory claims that five factors are needed to account for most of the variance in the field of personality: Extraversion, Neuroticism, Agreeableness, Conscientiousness and Openness to Experience.

What are the five 5 important questions regarding loan requests? ›

Five Questions to Answer before Approaching a Bank for a Commercial Loan
  • What is the purpose of this loan request?
  • What dollar amount do you need for your loan request?
  • What length of term do you need to repay the loan in monthly installments?
  • What entity will the name of the loan be under? (
Jul 24, 2019

What are the 4 basic financial concepts? ›

Anyone who did Accounting or Bookkeeping at school will be familiar with the 4 basic concepts, namely Income, Expenses, Assets and Liabilities.

What are personal finance questions? ›

What's the most reliable way to pay off debt? How can you improve your credit rating? How much of my income should go toward housing? How will you manage finances with members of your household? Should you be saving for retirement if you have credit card debt?

What is the 15 3 rule for credit? ›

The Takeaway

The 15/3 credit card payment rule is a strategy that involves making two payments each month to your credit card company. You make one payment 15 days before your statement is due and another payment three days before the due date.

What are 7 ways you can improve your credit score? ›

7 Ways to Improve Your Credit Score
  • Check your credit report regularly to see if information is correct.
  • Pay bills on time, especially mortgage or rent payments.
  • Keep balances low on credit cards. ...
  • Pay off debt rather than moving it around.
  • Pay more than the minimum required on your credit card.

What is the #1 way to build credit? ›

Paying bills on time and paying down balances on your credit cards are the most powerful steps you can take to raise your credit. Issuers report your payment behavior to the credit bureaus every 30 days, so positive steps can help your credit quickly.

What are six ways you can build a good credit score? ›

6 easy tips to help raise your credit score
  • Make your payments on time. ...
  • Set up autopay or calendar reminders. ...
  • Don't open too many accounts at once. ...
  • Get credit for paying monthly utility and cell phone bills on time. ...
  • Request a credit report and dispute any credit report errors. ...
  • Pay attention to your credit utilization rate.

What is the secret to building credit? ›

Focus On Building Good Credit Habits

All these higher credit score secrets have a basic concept in common: Use credit responsibly and avoid taking on more debt than you can handle. If you avoid credit card debt and pay your bills on time, your score will likely improve. Consumers also need to be patient.

How to build credit fast 7 simple strategies? ›

14 Tips on How to Build Credit Fast
  1. Request Your Free Credit Reports. ...
  2. Verify the Contents of Your Credit Reports. ...
  3. File a Credit Report Dispute If Errors Are Present. ...
  4. Pay Your Bills on Time — Every Time. ...
  5. Become an Authorized User on a Credit Card. ...
  6. Pay Off Debt and Accounts-in-collections Quickly.

What are the 5 Cs of credit management a new way of credit analysis? ›

One way to do this is by checking what's called the five C's of credit: character, capacity, capital, collateral and conditions. Understanding these criteria may help you boost your creditworthiness and qualify for credit.

What are three steps to building good credit? ›

  • Pay bills on time. Lenders consider payment records to help determine your reliability.
  • Maintain employment and/or primary residence for 2 or more years. Lenders use this information to help determine your stability.
  • Review your credit report. Regularly review for unauthorized activity and errors. Report issues immediately.

What has biggest impact on credit score? ›

Payment History: 35%

Your payment history carries the most weight in factors that affect your credit score, because it reveals whether you have a history of repaying funds that are loaned to you.

What most affects your credit score? ›

Payment history is the most important factor in maintaining a higher credit score. It accounts for 35% of your FICO score, which is the score most lenders look at. FICO considers your payment history as the leading predictor of whether you'll pay future debt on time.

What does piti stand for? ›

What Does PITI Stand For? PITI is an acronym that stands for principal, interest, taxes and insurance. Many mortgage lenders estimate PITI for you before determining whether you qualify for a mortgage.

What are the 3 biggest factors impacting your credit score? ›

The primary factors that affect your credit score include payment history, the amount of debt you owe, how long you've been using credit, new or recent credit, and types of credit used.

What are the two biggest factors that affect your credit score? ›

The two major scoring companies in the U.S., FICO and VantageScore, differ a bit in their approaches, but they agree on the two factors that are most important. Payment history and credit utilization, the portion of your credit limits that you actually use, make up more than half of your credit scores.

Which two of the following 5 components of a credit score are the most important? ›

While there are five factors that are used to calculate your FICO credit score, focusing on payment history and your debt-to-credit utilization ratio are the most important, as they account for nearly two-thirds of your credit score.

What are the 5 main categories that make up your credit score how much is each worth? ›

FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

What are the basic elements of credit? ›

Lenders score your loan application by these 5 Cs—Capacity, Capital, Collateral, Conditions and Character. Learn what they are so you can improve your eligibility when you present yourself to lenders.
What are the 5 Cs of credit?
  • Capacity. ...
  • Capital. ...
  • Collateral. ...
  • Conditions. ...
  • Character.
May 17, 2022

What are the 4 main reasons credit is important? ›

Here are some of the major benefits of building credit.
  • Better approval rates. If you have a good credit score, you're more likely to be approved for credit products, like a credit card or loan. ...
  • Lower interest rates. The higher your credit score, the lower interest rates you'll qualify for. ...
  • Better terms. ...
  • Robust benefits.

What are major credit issues? ›

Three common credit problems are: Lack of enough credit history. Denied credit application. Fraud and identity theft.

Why is good credit important 3 reasons? ›

A strong credit score — 760 and above — may give you important financial advantages, including access to more options, lower interest rates, and more lender choices.

What 4 questions should you ask yourself before using credit? ›

Here are some questions to consider before you swipe.
  • What will be the actual cost if I can't pay if off in full? ...
  • Can I save up enough to pay cash if I wait a few weeks? ...
  • Will using a credit card help if I need to return the item or extend the warranty? ...
  • MasterCard. ...
  • Will I get my money's worth?
Feb 15, 2013

What are the 4 C's of credit? ›

Standards may differ from lender to lender, but there are four core components — the four C's — that lender will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.

What are the 4 C's of credit for individuals? ›

Note: This is one of five blogs breaking down the Four Cs and a P of credit worthiness – character, capital, capacity, collateral, and purpose.

What are all 6 of the credit factors? ›

You are probably wondering by now what are the 6 factors that affect your credit score? They are your payment history, credit usage, derogatory marks, average age of credit, total accounts, and credit inquires.

What are three signs of credit problems? ›

These warning signs can include:
  • Difficulty paying bills on time.
  • Receiving collection calls or past due notices.
  • Living in your overdraft or line of credit.
  • Losing sleep worrying about debts.
  • Spending more than your income allows.
  • Not paying credit cards in full each month.
  • Impulsive spending due to financial worries.

What is the biggest impact on credit? ›

Most important: Payment history

Your payment history is one of the most important credit scoring factors and can have the biggest impact on your scores. Having a long history of on-time payments is best for your credit scores, while missing a payment could hurt them.

What are the three C's of good credit? ›

Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.

What are the 5 C's of credit for individual consumers? ›

The five Cs of credit are character, capacity, capital, collateral, and conditions.

What are the two most important things to look for on your credit report? ›

Of these factors, payment history and credit utilization are the most important information. Together, they make up more than 60% of the impact on your credit scores.

What is the most important in the 4 C's of credit? ›

Of the Four C's of Credit, capacity is often the most important. Capacity refers to a borrower's ability to pay back his/her loan. Obviously, your ability to pay back a loan is an important factor for a lender when considering you for a loan, but different lenders will measure this ability in different ways.

What 7 questions should you ask or know before signing up for a credit card? ›

So when you choose to get a credit card, first ask yourself these seven questions:
  • Why Are You Considering Getting a Credit Card? ...
  • What is the Interest Rate? ...
  • What is the Credit Limit? ...
  • Is there an Annual Fee? ...
  • What are the Penalties & Fees? ...
  • What are the Rewards Offered? ...
  • Can you balance your Credit Utilization Ratio?
Feb 26, 2021


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