Financial education should begin at a very young age. Don’t wait until your child is ready to go away to college to teach the basic principles of debt, money management and credit. He should already have a firm grasp on those concepts before he packs his bags. And by all means, don’t let your teen head off to college with a credit card in hand, not knowing how to handle it. Your teen needs to learn about credit now.
We all need to know about good credit
A great credit score is, in this country, the primary means by which we achieve certain financial goals. You don’t have to depend on your credit score for major purchases, but the only other option is to save up and pay cash. While it may be possible to buy a home that way, most of us would prefer to get in 30 years earlier on borrowed money.
The difference between a great credit score and a poor or average credit score can be seen in the money that’s in your pocket. You might be able to buy a car with a credit score of 620, but the interest rate you pay will be sky high compared to the rate offered to the customer whose score is 790. For those with poor or average credit, financing is simply more expensive. They pay more – in monthly payments and overall cost – for the privilege of using other peoples’ money to buy what they need.
Why teens might not know
Your child probably learned basic math skills in elementary school, like how to count her change after making a purchase. Later, though, attention shifted to shapes and algebraic formulas. Typical American education includes little about our credit scores and credit histories, although those items are of critical importance to us all when we become adults. It’s up to parents to help teens learn.
Why your teen needs to know
Understanding how credit cards work will help your child avoid the trap of revolving debt.
Understanding credit, in general, will open the door to better interest rates and approved applications for big ticket items when the time is right.
Understanding how to monitor his credit could help your teen avoid becoming the victim of fraud.
What to teach your teen
With a firm grasp on a few basic principles, your teen will be well on her way to responsible financial management, an outstanding credit score and great financing opportunities. The main topics you need to address are:
- What is a credit score?
- How does credit affect me?
- How do I keep tabs on my credit?
- How do I protect my credit?
Teaching your teen about credit
- Explain that credit means debt. Debt means money that you will owe someone until you pay it off.
- Help your child learn to save for what she wants, especially big ticket items like cell phones or iPods
- Help your child set a standard for automatic saving, like one-third of his allowance or half of all birthday gifts
- Go slowly, but at some point introduce the ways to build a great credit score, like using a credit card sparingly and paying it off every month. Start with a secured card in the child’s name, using his or her own savings to secure the card.
- Explain the right and wrong reasons for using credit cards. Right = convenience; wrong = to buy something you can’t afford.
- Explain the cost of interest at different rates, and the pros and cons of paying an annual fee
- Help your child learn how to monitor his credit
- Don’t co-sign. Let your child build credit the old fashioned way.
- Don’t bail out your child. If she gets into a financial jam, help her seek out free or low-cost assistance from the National Foundation for Credit Counseling or the Consumer Credit Counseling Service.
The bottom line is that the more your child understands about credit, the more likely she’ll become an adult who is able to maintain excellent financial health. The earlier you start teaching, the more your child will internalize the concepts, and the stronger the foundation of knowledge will be.