When is The Right Time to Teach Kids about Credit: Establishing Credit Card Readiness
Teaching children good credit habits have become a necessary dilemma of the modern parent. Today’s marketing strategies focused on kids and credit cards coupled with the ease of acquiring anything online means education about money may need to occur earlier than usual. The current epidemic of debt laden young adults in America also testifies to the fact that credit card and student loan acquisition has too often preceded important financial education and spending caveats.
Based on a conservative estimation by Sallie Mae (a student loan marketing organization) most undergraduate college students have a debt of $2,169 and at least $8,162 after they graduate. Student loans combined with other credit card debt often trap adolescents into problematic and long term financial cycles.
We also agree with the financial Industry Regulatory Authority, that a negative credit score can seriously impact a child’s financial future. A credit score is a number that lenders use to determine eligibility for a mortgage, line of credit as well as the interest rate you pay on credit. It can also make the difference in hiring decisions, renting an apartment or home, getting a loan to start a business or making an essential major purchase. A keen understanding of the impact of credit on future decisions is therefore essential to avoid making serious credit card mistakes.
While credit card use trends may vary based on demographics such as age, race and gender; having insight or knowledge about the pitfalls of these plastic wonders is beneficial to everyone with access to them. Early education can also prevent hard to repair financial decisions that many unsuspecting first time card holders make. To help your child develop a positive relationship with money and understand the proper use of a credit card it is important to model healthy monetary decisions coupled with a moderate financial education plan.
The following are some important issues parents can teach or discuss with kids before giving them a credit card:
- Use of credit cards will generate a negative or positive credit score. In a 2015 report by the Consumer Financial Protection Bureau (CFPB); individuals who were considered to be “credit invisible,” had no records with credit reporting agencies or insufficient records to generate a credit score. Insufficient credit histories and low credit scores affect long term buying power. The following CFPB chart indicate that millions of Americans have invisible or insufficient credit history to generate a credit score.
- Credit status also affect interest rates. According to surveys of individuals between 18 and 24, most are paying higher interest rates on credit cards due to invisible or insufficient credit history.
- Help your child to open a savings account. A stepping stone to building a credible credit score begins with the establishment of a positive banking history. Teach your child the importance of saving by getting them accustomed to making regular deposits and watching their money grow.
- A checking account is another important tool that can help kids learn how to spend money within limits. Once your child has developed the saving habit over a reasonable period of time they can then learn how to handle a checking account. This will also provide an opportunity to learn about the pitfalls of overspending such as a declined debit purchase or overdraft charges.
- Evaluate your child’s credit card readiness. Your child may be ready for a credit card if he or she demonstrate some financial acumen in their spending habits or management of their saving and or checking account.
- Don’t assume that your child understands how credit works. Having an open discussion about issues such as impulse buying, irrational spending, credit card fees, timely repayment and credit scores may help to clear up misconceptions about how credit cards work and the importance of building good credit.
- Until your child is eligible to receive a credit card, you can help to jumpstart your child's credit history by adding him or her as an authorized user on one of your credit card accounts. By making your child an authorized user, you are able to observe your child’s spending habits first hand. As an authorized user on your credit card, you control the account while giving your child access to all the benefits of using a credit card as well as building a credit history on their credit report. You also retain the power to remove their user status or close the account if necessary.
Children who do not learn good financial habits often make credit card mistakes that can later become a burden to themselves as well as their parents. An early fiscal education reduces economic vulnerability and empower kids with the knowledge to become financially stable sooner than later.
Matt Logan Inc is an independent firm with Securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group Inc., a Registered Investment Advisor. Summit Brokerage Services, Inc., its affiliates and Matt Logan Inc. do not give tax or legal advice. You should consult an experienced professional regarding the tax consequences of a specific transaction. These are the views of Matt Logan Inc, and not necessarily those of Summit Brokerage Services, Inc. and any of its affiliates and should not be construed as investment advice.