Let’s face it, there are plenty of adults who don’t know what a credit score is. But this doesn’t mean that they shouldn’t know. In fact, grown ups with no knowledge of credit create a lot of problems for themselves. Without the underlying knowledge of credit, it’s really easy for a financial life to go off the rails for a long time. Bad credit results in high payments for things like loans. It can mean that a mortgage of auto loan isn’t available at all. It can even mean that finding good employment is hard or impossible, though laws about this kind of discrimination are going into effect around the country. In any case, people with low credit scores have a tougher go at it, financially speaking, than is really necessary. A credit repair service may be needed to repair things. So why let your kids go through these challenges. Is now the time to start talking to your kids about credit and credit scores?
Kids can’t handle a total understanding of credit, but they can start to comprehend some of the basics. Here are a few good places to start.
- What is Credit? All kids should understand that credit is borrowed money. When they use your credit card, let them know that they’re bringing borrowed money into your credit account, money which you will have to pay back. For this reason, let them understand that credit isn’t to be used recklessly, because it can be hard to pay back lots of money.
- Explain Interest. Interest is the money that lenders charge you for the privilege of borrowing their money. For people with low credit scores, this can be a whole lot of money, because the lender thinks that it’s likely that the borrower might not pay the money back.
- Explain What a Credit Score is. Credit scores are based on how you use your credit. If you don’t carry a whole bunch of credit on your cards and credit accounts, and pay your bills on time, you’ll probably have a good credit score. But if you don’t use your credit wisely, your credit score will get lower. Lower credit scores tell banks and credit card companies that you aren’t smart with money, and that they should charge you a lot of interest, because you might not pay back the loan at all.
- Explain How to Improve a Credit Score. If your kid is still following along, great. Explain that keeping credit simple and paying things on time will improve a credit score. If you have just one credit card, for example, don’t close it. Leave it open, always pay it on time, and don’t carry big balances on it. This shows that you can handle the responsibility of a credit card, and your credit score will be good to reflect that.
There are plenty of other things that you could teach you kid about credit, but these basics will be more than enough to set him or her out on a good credit course for life.
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