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Financial literacy and young adults have a virtually non-existent relationship. School systems have taken steps to teach money management skills to prepare tomorrow’s future leaders financially, but, sound money management still requires experience. Some lessons can only be taught through trial and error, but, there are other lessons that parents can teach their children. Learning about credit cards is a prime example.
Live Within Your Means
The easiest way to damage a good FICO credit score is to consistently spend more than you make each month. Your child might be able to pull from savings to cover the difference for a period of time, but, eventually, they will not be able to afford the payments and the late fees and interest fees will begin to accumulate. If those missed payments are for loans or credit cards, the missed payments will be reported to the credit bureaus causing the credit score to lower. In short, it is easy to misunderstand how your credit score changes with different actions.
It can be very easy for children and adults to overextend themselves with credit cards that have high credit limits and a temptation to spend more money than they could normally afford. As the average credit card interest rate is 15%, significantly higher than any student loan or personal loan, using a debit card or paying in cash are great alternatives to unnecessary credit card transactions. An approximate 25% of Millennials own a credit card, far less than older generations, but the number is likely to increase as they start families and establish careers. It’s easier to learn this lesson before receiving access to larger credit lines.
Make on Time Payments
The credit bureaus value payment history the most when determining a credit score. In addition to having a penalized credit score, late payments also bring additional fees that make purchases even more expensive. Children that have never had to pay bills, might not realize that missed or late payments carry these short term and long term payments.
Enrolling in automated payments can help prevent late payments and other companies also allow customers to create payment reminders several days before a payment due date allowing ample time to schedule a payment before it’s too late. Plus, student loan companies will also reduce the interest rate 0.25% when signing up for automated payments.
Avoid Store Charge Cards
Credit cards are the most popular form of revolving debt, but, many do not realize that store charge cards operate the same way and confuse them for loyalty rewards cards that you give to the cashier before paying for a purchase. Store charge cards might entice young people because they can save a lot of money on the first purchase made and can be applied for while checking out. A few weeks later they receive a bill in the mail and confuse for a piece of junk mail, forgetting they had actually applied for a store credit card.
Store charge cards can save money, but each application counts as a hard inquiry on a credit report. Plus, they are only valid for purchases at one brand of stores. Acceptable if they normally shop at this retail location, but, a traditional credit card is more useful and flexible.
Monitor Credit Reports and Credit Score
Sometimes financial information is improperly reported to the credit bureaus. While anybody can request a free credit report once a year, there are a host of services, including Credit Karma and Credit Sesame, that monitor your credit information for free and provide you with a complimentary credit score each month. There are paid credit monitoring services as well, but, the free services will report on a monthly basis if any suspicious activity has occurred.
Misreported information, such as reporting a late payment in error, will blemish a credit report and credit score. If your child is planning to apply for new financing in the new future, it is also a good idea to review the credit reports several months before applying to allow sufficient time to correct any potential errors.
Guard Personal Information
Identity theft is transitioning from the physical world to the digital world at an increasing rate each year. It might be a difficult task as fraudsters can breach the merchant’s internet servers that store payment information or personal information. But, ways to limit sharing personal information is to maintain a limited presence on social media and not saving payment information on online websites.
In addition to not sharing social security numbers, children should also not share their full name or address on the web unless absolutely necessary. Thieves just need basic information to apply for fraudulent credit cards or loan applications. Signing up for a credit monitoring service will help catch identity theft, but, only after it has already happened. Guarding digital information, like keeping certain documents out of a wallet or purse, is vital to preventing others from indirectly damaging a credit score.
Immediately Pay Any Parking or Traffic Tickets
If your child lives or works in the city, chances are they will get a parking or traffic ticket if they drive and have to pay for parking. Expired parking meters and parking in restricted areas will warrant a ticket. At the bottom of the ticket, there is usually a disclaimer that states any delinquent tickets will be reported to the credit bureaus until the ticket is paid or sent to a collections agency.
Be Cautious When Co-signing for Friends
While not every young adult is in the financial position to co-sign the loan application for a friend, this can be another way to damage a credit score and a friendship if the friend misses payments. This is because a co-signor is liable to make payments if the primary borrower cannot pay. Instead of co-signing for a loan, it might be better to make a small personal loan. This way a credit score is not damaged if the friend cannot pay back the loan, and the child isn’t responsible for a larger borrowed amount had they co-signed.
The best financial wisdom a parent can offer their child is to pay the bills each month and not borrow or spend more than they can afford. These two nuggets might seem like common sense to adults, but that just is not the case for upcoming generations. Even though they can be written off as common sense, their importance is not diminished one bit. Keep up with your credit card in order to ensure financial success in the future.
Author: Jeff Gitlen