Gimme Credit…please?

You might think that talking about credit to your kids is too complicated plus they won’t need to use credit until they are an adult. Think again.

Learning about credit early will teach your kids and teens valuable life lessons. As an adult, credit surrounds most of our financial decisions from buying a house to getting a job. And personally, I think that we could all use a refresher in “delayed gratification”. Credit played a major role in pushing America over the edge into the recent deep recession.

You can teach the basics of credit even to young children:

• Use every day events to talk about credit in your life. Talk about why the family borrows money – your home, the cars, and college. 

• When you swipe your credit card at the store, talk about how the bill comes in the mail (or by email) and you have to pay the bill. Talk about the differences between paying the whole bill or only paying part of the bill (you have to pay interest).

• Lend your child some money to buy something and have them pay it back to you (with interest) over a set time. Let them calculate the interest and total cost.

For teens, start with a pre-paid/gift card or a debit card. This way they will learn to only spend what they have. Talk about learning to pay off your balance each month. For bigger ticket items, talk about learning to save before spending. What a wonderful concept they will learn: delayed gratification!

In Feb 2010, Congress passed the CARD (Credit Card Accountability, Responsibility and Disclosure) Act which makes it harder for young adults to get a credit card without some restrictions such as:

• Credit cards for teens - A credit card cannot be issued to someone under age 21, unless they have a co-signer (who is 21 or over), or can provide proof that they can repay.

• College credit card recruitment - A credit card company cannot offer gifts or any promotional items (i.e. coupons for free pizza) to entice students to take on debt by signing with their credit cards.

For young adults (college and first jobs), it’s a Catch-22. It is hard to get credit if you don’t already have it, and if you already have credit then you don’t need. For young adults they will need to build credit over time so they can qualify for larger loans (like a mortgage) when they need it.

There are a few options to help your young adult build credit worthiness:

• Bank Secured Card – a bank or credit union sets up a credit card with the credit limit equal to the amount in the account. If you don’t make the monthly payment, the bank will deduct the payment from your account. The owner of the secured card will build credit with this card. However there are various fees and higher interest rates associated with these cards so shop around and use a trusted bank to issue the card. Also, verify that the card will report to the major credit reporting companies otherwise the card is a waste of time and money. Once credit is established, you should close this card and move on a traditional unsecured credit card.

• Co-sign – you can be a co-signer on your young adult’s unsecured credit card but this means that your credit score will be negatively impacted if your offspring doesn’t make their payments.

• Retail Credit Card or Finance Store Purchase – (i.e. GAP, Best Buy or Gas Station) Usually these programs are easier to qualify for and can help you build credit. Be sure to check that the retailer will report your loan to the major credit reporting companies.

Most important, this is a time for your kids and teens to learn to use credit wisely. You will be there to discuss how the interest rate impacts the ultimate price of their purchases, how important it is to pay on-time, the mechanics of credit limits, and what types of purchases are appropriate for credit cards. They can practice while the stakes are lower and you are there to guide them.

Last bit of advice – you have the right to a free credit report annually from the three major credit reporting agencies. You should teach your teens and young adults to do this using AnnualCreditReport.com or (877) 322-8228 (the only authorized source to get your free credit report).