Money Conversations: The Gift of Good Credit
Valentine’s Day is a celebration of love and care. The store shelves overflow with teddy bears and heart-shaped boxes of chocolate. The flower shops boast lavish arrangements of flowers. The bakeries won’t stop surprising with original confections. Couples rush to make restaurant reservations or arrange a surprise at home. Love is in the air, and this month we are inspired yet again to ponder on what special gift we can give to our loved ones.
We all may view the concept of love differently, yet most parents will agree that we see love for our children through the prism of “how we can provide for their well-being.” So, here is one idea in this connection: how about a gift of good credit?
As a financial counselor, I often hear these questions: When is a good time to start teaching my child about credit and when is a good time to actually start building their credit?
Some kids mature earlier; and some – a little later. You, as a parent, are the best judge of how prepared your child is for this complex topic. However, here is a general plan of action:
First, your children start learning basic mathematical skills in their early school years. After they get their arithmetic down and understand the general concept of economic exchange, it is time to start teaching them about the value of money and time! You can give them pocket money for completing their chores or small jobs on the side. At the same time, make sure to teach them about budgeting and saving. You can never stress enough the importance of saving. Once your child understands, learns and starts applying these principles under your guidance, you may proceed with explaining the concept of credit. On average, kids in their early teen years are ready to discuss the topic of how the loans works. The idea here, of course, is to steer them away from borrowing money. Make sure to explain that using credit should only be reserved for big items such as buying a home or a vehicle and rarely for emergency situations. It is always preferable to save ahead and pay cash for other purchases. This is where you mention the time value of money and compounding interest. Time is money, as they say; but money also buys you time. Compare saving ahead for an item and enjoying it interest free vs. buying an item with borrowed money and then spending years to pay it off with interest.
For parents who like to teach with hands-on approach, here’s an idea. Lend some money to your kids when you’re out and about and they want to get a special treat, such as gum or a candy bar, and let them feel the pain of having to pay it back.
So this is where the confusion starts: namely, why is credit so important if you want to stay away from it? And how do you get credit since most financial institutions won’t give you any without previous credit experience?
Credit is important because even if you do not want to borrow money, pretty much everyone wants to know how trustworthy you are. Whether you want to rent an apartment, start a phone line or even get a job, the company wants to have a guarantee that they are dealing with a reliable individual. Credit history does just that: shows how true you stay to your word by making timely payments on your obligations.
Generally, no bank will issue credit to a minor individual (under age 21) alone. They might be approved for a student loan at age 18, but it’s also good to avoid those if you can. To get your child’s credit going before they reach 18, you can add them as a co-signer on your loan or as an authorized user on your credit card (also depending on your financial institution). 16 is probably a good age to do that. Credit unions are good organizations when it comes to helping you and your family to build and maintain credit.
So, if you want to give your kids a head start in life, start their credit early and make sure to teach them how to manage it. Teaching responsibility is the best gift and the highest form of love we, as parents, can give to our children.