While many American parents are talking to their kids about money, most are skipping over a key money term: credit. That’s according to a Chase survey, which found that only 32 percent of parents have explained what a credit score is. And that leaves many young adults unprepared to open their first credit card.
Personal finance expert Farnoosh Torabi recommends introducing the concept of credit to your kids when they're around age 16. Starting in high school, "you definitely want to have a credit conversation with them because they are approaching college," she tells CNBC Make It. "And they'll be able to grasp concepts like compound interest and interest rates."
Just because you have a conversation with them doesn’t necessarily mean they’re ready for their first card, though. Torabi recommends testing them out with cash first, and then with a debit card. Observe how they use their money: Do they spend it all right away? Do they think through their purchases? Do they save a chunk of it?
The important concept to teach is that there are a lot of different ways to use the money they earn, says Torabi: "It's not just to spend on movie tickets. You can spend it, save it, invest it, lend it or donate it. And knowing that, they'll start to really leverage their freedom."
Once they prove to be responsible with cash and a debit card, you can consider graduating them to a credit card, she adds.
Another option is to add them as an authorized user on your credit card before helping them open their own. "Being an authorized user on a parents credit card is a great way to quickly establish credit," says Torabi. Plus, your kid doesn't have to do anything to reap the benefits: "As long as they're an authorized user and the family is spending responsibly with the card, that credit behavior gets reported on every person's credit report that is tied to that card, whether you were the one spending or not. ... The caveat to that is, it only works if everyone is spending responsibly."
The first step, though, is to explain to your kids how a credit score, which is represented as a number between 300 and 850, is a crucial component of your financial health. The , the more likely you are to get , car or other loan. Currently, 25 percent of millennials don't know what a credit score is and results of surveys and money IQ tests both show that there's a lot of confusion around the topic.
That's something parents can help with, as long as they make conversations easy to grasp. As with every money concept you introduce to your kids, Torabi says, "start with training wheels."
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