If your teenagers are like many, they probably think they already know the ins and outs of just about everything including money and credit. They are yearning for their first debit and/or credit card, thinking about buying their first car and also looking at college and the dollars associated with a 4-year degree.
Odds are that even if they are able to take an accounting class at school, they really aren’t learning about personal finances – so that’s where parents come in. Talking about money related topics can be difficult for many parents, because they aren’t confident in their own financial situation or they don’t fully understand the topics. It’s important to make sure your children understand certain financial topics so that they don’t repeat some of our mistakes.
Some children are afraid of using credit and obtaining some debt because of horror stories that they may have heard. While carrying balances on high-interest rate credit cards is not good, a low interest rate on an auto loan is perfectly acceptable.
Credit Score – This is something that is vital to children truly understanding credit. Even more important than knowing what a good number is, is learning how the number is calculated:
- Payment History – 35% – late and on-time payments are recorded
- Amounts Owed – 30% – How much money do you owe creditors or lenders
- Length of Credit History – 15% – How old or recent are your accounts
- New Credit – 10% – What percentage of your accounts were open recently
- Credit Mix – 10% – The mix of loans, lines of credit, and credit cards
This will help you show your teen how having a poor credit score, and how it became so poor, can affect their interest rate on an auto loan – and effect the payment amount. Because let’s be honest, in today’s financial world your credit score is your lifeline.
Credit Cards – A good way to kick start your teens credit journey is by making them an authorized user on one of your existing credit cards. You can review the monthly bill with them, show them how the interest rate affects the amount you owe, and explain how the amount owed and payment history affect your credit score. Just keep in mind that you are responsible for any charges that your child makes, so they need to have some self-control over their spending.
Debit vs. Credit – Debit cards are a great way to teach your teens about spending and unlike cash, they can see where every dollar spent is going. Teens can learn that once the money is gone from the account, they can’t use the card OR they may incur overdraft fees. Litchfield Bancorp offers The Graduate Account – which is a fantastic checking account with a debit card available to 16-26-year olds.
Loans – At some point in their lifetime, your teen will probably need to take out a loan – either for a car, home mortgage, personal loan, or to pay for college. Your teen should understand the commitment they are agreeing to and how interest and repayment works. They need to also understand how a credit score affects their interest rate and approval odds and how the new loan will affect their future credit score.
While your student may be getting a fantastic education, you can’t just rely on them to teach your kids the finance basics. Learning about credit and how a credit score affects their future is a big step in financial responsibility as teens move into becoming young adults and will eventually want to make big purchases. Each financial decision they make can affect their score based on the 5 categories listed above. For example, if they decide to open up 3 new credit cards in a short period of time, it can affect their length of credit history avers, new credit, and credit mix all before they even charge something.
Credit should be treated as a tool. When used responsibly it can help them build a successful future but used irresponsibly or without the proper knowledge of how it can affect them, it can become a huge roadblock.
Additional credit topics you can talk to your teen about: Carrying a balance on your credit card – how does it affect your credit score, Finance Tips Every 18 Year Old Should Know, How Being an Authorized User Affects Your Credit
Stephen Yonych Jr.
Assistant Vice President, Watertown Manager