05/26/2015 07:46 pm ET Updated Dec 06, 2017

6 Important Credit Lessons Your Parents Didn't Teach You

It can be challenging to listen to the wisdom of the generations before us (we all have to make our own mistakes, right?), but there are some key credit lessons that are long overdue their time in the spotlight.

Here are six credit lessons we wish our parents had taught us.


1. Paying interest is painful. Really, really painful

Let's be real: making monthly credit card payments isn't fun. But the pain (literally) compounds when you top off your monthly bill with interest payments. With many credit cards carrying an interest rate above 12 percent, missing even one payment can result in a large (and painful) interest payment.

If Mom had said something closer to, "Paying interest is like scraping your knee in the same spot every day," the message may have sunk in a little deeper.

2. Even a half-a-percentage interest rate reduction matters

Negotiating isn't always on the docket for financial literacy programs, but it's worth mentioning: Some numbers carry more wiggle room than you'd expect. When opening a new line of credit, negotiate your rates. While you may not always get your asking interest rate, you and your lender could very well land on a number lower than the original offer.

And, yes, even a .5 percent reduction matters when it comes to paying interest. A $1,000 loan with a 17 percent interest rate reduced to a 16.5 percent interest rate would save you $5 a month. That's a latte, a beer, or, in a year, a pair of shoes.

3. Credit can offer greater protections against fraud

Quick, what's the safest way to make a purchase: cash, credit, or debit? Answer: credit.

Don't worry, I didn't know either.

Choosing to use a credit card instead of swiping your debit card can offer greater protections against fraudulent purchases. Most credit card companies will remove fraudulent purchases as soon as you alert them to unusual/suspicious activity. Credit cards also cap your liability at $50. Claiming fraud for a debit purchase, on the other hand, may require you to file a more complicated claim -- and fraudulent purchases may not be reimbursed for up to two weeks.

4. Credit doesn't build itself

This one may sound annoyingly similar to Mom's "The bed won't make itself!" shtick. But really, credit doesn't build itself.

Be proactive when building credit. A good credit score can save you a lot of money in the long run. For instance, strong credit can help you lock down lower interest rates and empower you to make large financial decisions like taking out a mortgage (when it makes sense!).

A smart way to start building your credit is to start soon and start small. Make small purchases using a credit card and then immediately pay these purchases off. Better yet, start with a secured credit card. The "small beans" approach to minor, easily paid purchases can help build good credit habits early on.

5. Credit limits aren't "suggestions" (and a 30 percent credit utilization rate goes quickly)

Opening that first credit card can often be confused with scoring a windfall at the bank. But being approved for a $2,500 credit line doesn't mean you have $2,500 at your beck and call. In fact, credit bureaus recommend that you stick below a 30 percent credit utilization rate. That means spending only up to 30 percent of your credit line.

To avoid maxing out your credit (or spending above your means), be deliberate in the way you use your credit card for purchasing. Additionally, enter every purchase with a game plan by asking, "What's my timeline for paying this loan back? Is it realistic?"

6. A financial philosophy can help make or break your credit score

"Everything will work out in the end." How many kids have heard this oft-repeated parental mantra? It's short and sweet (and true in the grand scheme of things).

Unfortunately, it doesn't translate when you're trying to negotiate an overdue credit card bill with your lender. It's crucial to tack down a financial philosophy as you begin your financial journey. Having a clear (and actionable) financial philosophy will guide you as you make financial decisions.