One of the biggest realizations of adulthood is how woefully unprepared the nearly two decades of schooling leaves us when stepping onto the real world. Parents, teachers, and society at large obsess over the grades and GPAs, while completely ignoring the score that we will carry all through our lives, and something that impacts every personal and professional aspect for years ahead — the credit score.
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Given the number of adults who remain mired in financial issues all through their careers, and the millions of college graduates who currently join the workforce with six figures in student debt, it is high time for parents to start discussing credit, and credit scores with their kids.
In this article we lay out the right approach, and framework to get started, to leave your kids with a sound financial foundation.
Importance of Good Credit
It is essential for kids to get a good understanding of how credit works, and how a credit score impacts various aspects of adult life. This should ideally extend beyond just banking and credit, with an emphasis on how a credit score is a numerical representation of being trustworthy, and responsible, while having an impact on everything from renting a house, to applying for a job.
That being said, kids should also be aware of why credit isn’t just a death pit, and with the right management, credit cards, mortgages, and other loans can significantly enhance their financial future, leading towards financial independence early on in their lives.
Credit Basics
Once the stage has been set on the importance of good credit, it is time to briefly explain the workings of the credit system, along with its many components and moving parts.
Credit Bureaus
These are the companies collecting information about your financial history. Examples – Equifax, Experian, and TransUnion.
Credit Reports
Bureaus compile the financial information of individuals into credit reports which make up the basis of credit scores.
Credit Score
Discuss what a credit score is and how it is determined on the basis of the payment history, types of credit the person owes, number of accounts held, and length of credit history.
Talk about the acceptable credit score range and the benefits of having a good credit score – qualifying for credit cards and loans, getting low-interest rates, and getting approved for a high credit limit.
You can also sign up for credit score monitoring, and share the insights, and reports with your kids to help them get a better view of the inner workings of credit.
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Building Credit
Several facts and myths exist around credit building. The topic can be confusing, particularly for young adults with no experience in managing bills. Consider sharing these important facts about credit with your kids to get the ball rolling.
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Building credit takes time
You can’t build credit quickly but it is rather a process that involves discipline, and making timely payments on loans, credit cards, and other payables.
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Credit accounts help build credit
If your lender reports the credit account to the bureaus, you can build your credit based on your use of the account over time.
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You don’t need a credit card balance
The best way to achieve a good credit score or maintain it is to pay off the credit card balance each month.
Responsible Use of Credit
Next, it is crucial for your kids to understand that straying away from credit isn’t the answer for a robust financial future, and the responsible use of credit can help enhance their perception even in housing, and job markets, making it one of the most crucial skills to impart before your kids head off to college.
When it comes to responsible use of credit, here are some core tenets to convey;
- Understanding the terms associated with loans and credit cards, such as APRs, adjustable rates, mortgages, secured, unsecured, and more.
- Staying under the credit limit with your credit cards, lines of credit, and overdrafts, as that is one of the crucial considerations when computing the credit score. Having access to credit, but staying under the limits, point towards responsible usage.
- Making the monthly payment in full whenever possible. Another key tenet of responsible credit usage, and this extends beyond just your credit cards, and encompasses all bill payments. If you pay in-full, and on-time, you stand to be rewarded with a higher score.
- Other factors that impact the credit score, such as multiple applications for a loan, and the hard-pull, or soft-pull on the credit report, and its impact on overall creditworthiness.
How to Get Started
Once you are confident that the kids have understood the core essence of credit, it’s time to have them handle the ropes themselves, by helping them establish a strong credit profile.
Apply For A Credit Card
While it can be scary to think of handing your teenager a credit card of their own, a secured, or student credit card with limits and tracking is a great way to establish a credit history before they become adults.
Make Them An Authorized User
This involves adding your kids to your own credit card by making them an authorized user. Here again, they stand to build their own credit profile, under the stern restrictions and supervision set by you.
Final Thoughts
As the lack of financial literacy continues to ruin millions of lives, and promising careers, imparting the necessary financial wisdom is almost a rite of passage, akin to the birds and the bees talk for most parents of Gen Z’ers.
Hopefully, this article helps you kickstart the discussion, and creates the essential framework for building a sound financial base for your family.
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