7 facts to consider before talking to kids about credit
What your child learns about credit today could affect the decisions she makes when she has her own credit cards and loans in a few years. But it can be tough to explain how credit works. Here are seven key facts to consider before you start the conversation.
Teens may not understand how credit cards work
Chances are, even older kids don’t realize credit card companies charge interest and additional fees that can really add up. Explaining interest rates to kids can help set them on the right track when they start managing their own credit cards.
And they may not realize that all debt is not alike
It’s easy to see why tweens and teens may think that everything from a car loan to a college loan to a payday loan has the same consequences, since they seem to function by the same basic rules. Parents can explain that the terms of the debt and how the debt is used determine its effect on personal finances.
Credit score matters—a lot
Most Americans’ credit scores fall within the 680 to 720 range. A score above 740 typically qualifies you for lower interest rates.
Source: myFICO (January 2015)
Your child’s early credit choices could determine her financial future
Mortgage lenders, credit card issuers, banks and auto lenders use your credit score to help gauge their risk in lending you money. With a good credit score, you may qualify for lower interest rates because you’re perceived as a desirable customer and a low risk. Young adults may not know that, in some cases, credit reports are also used to assess how responsible you are by insurance companies, landlords and potential employers.
Credit report dings can haunt a young person for a long time
The impact of credit inquiries and negative activity diminishes over time but generally doesn’t disappear for years. Even if you pay off overdue debt quickly, it can take seven to 10 years from the delinquency date for negative marks to be removed from your report.
Adding a teen’s name to your credit card can help them—but the risk is on you
As an authorized user on a parent’s credit card account, the account appears both on your credit report and the child’s. The child can use the card to make purchases but isn’t responsible for repayment. Instead, parents are responsible for anything the teen buys.
The right message about credit can stay with kids forever
When it comes to the value of a good credit history, the lessons parents impart today can help kids establish positive habits later. If they’re too credit-averse and use cash or debit cards for everything, they will not establish a credit history and could have a hard time qualifying for a mortgage or car loan. But if they overuse credit, they can easily fall into too much debt. That’s why it’s important to understand how to use credit without abusing it.