Credit 101

Good credit can open doors as much as bad credit can raise barriers. Teaching your child credit’s advantages and challenges will help them establish a positive credit history and empower them to borrow for big purchases later in life.

Learning the basics

Before jumping into the topic of credit, it’s important to have a solid foundation of understanding personal finance basics. I typically advise clients to start teaching their kids about credit between ages 12-16 – at a younger age, they have more time to learn and practice the concepts in the safety of their home.

These are some conversation topics to have with your child to lay the groundwork:

• Budgeting: Is your child familiar with the concepts of spending, giving and saving? Practicing these habits from a young age will help them understand the importance of saving and budgeting.
• Spending: When does it make sense to pay for something with cash, a credit card or a loan? Talk with your child about Annual Percentage Rates (APR) and how they compare between a loan and a credit card.
• Personal experience: Talk with your child about how you use your credit card and, if willing, go over your credit report with them.

A great way to start working on those basic concepts is with a youth savings account. At Everence^® Federal Credit Union we will set up accounts with a debit card for children with an adult joint owner's authorization. I created youth savings accounts for my children, and it was a wonderful way to teach them how a debit card worked along with the advantages and pitfalls of owning one while they were still living at home.

Understanding credit score

Once the foundation of personal finance basics is laid, it’s time to talk with your older children about the importance of a credit score, and how it can help – or hurt – their financial future.

Credit score matters because it allows a better interest rate in which to borrow funds for a loan. It may not feel important, but credit also can give better terms for a cell phone plan, better utility deposits when renting a home, and better car insurance rates. A solid credit report with years of experience will increase the score.

Likewise, it is important to know that missing payments on a loan or credit card decrease the credit score. Credit utilization is the portion of available credit to use, and a general rule is to spend no more than 30% of the total credit utilization. Your credit score can be affected if you go over the 30% threshold.

Teens cannot apply for a credit card of their own until they are 18, and there are some restrictions that apply until they are 21. But you can add your teen as an authorized user to your credit card, and this can be a good opportunity for them to see firsthand how they work. There is no minimum age requirement for adding an authorized user to your account.

The Everence MyNeighbor credit card program also has a secure option for young adults. When a person opens a secured card, they make a small deposit that serves as collateral and effectively becomes their credit limit. This option is available to anyone who wishes to get a secured card.

A note about security

Even if you are not interested in adding your child onto your credit card, it doesn’t hurt to look for a credit report and protect their credit. Children are at risk for identity fraud because we often forget to check their credit report and to monitor this information.

Child identity theft happens when someone takes a child’s sensitive personal information and uses it to get services or benefits, or to commit fraud. They might use your child’s Social Security number, name and address, or date of birth. They could use the stolen information to set up credit cards or apply for a loan.

Generally, a child under 18 won’t have a credit report unless someone is using his or her information for fraud. Too often, this is discovered when a teen applies for a college loan and is denied. As a parent, you can visit each of the three credit bureaus online and freeze your child’s credit so that no fraudulent accounts can be established.

When we think about our children’s future, we often focus on academic and career achievements. We also need to prepare them for financial success and give them the resources to build a bright future.