8 Nov 2008
Give Your Kids A Good Foundation And They Will Be Set For Life
This is a subject that is not taught in schools, therefore it is a parents responsibility to educate their children on the mattes of credit and understanding how their credit reports will affect them in the future. Your teen is at a very impressionable age, they feel grown up and want to get credit cards and loans so they can have all the good things in life. Without a solid foundation of information on credit and its pitfalls, your teens may be making credit decision without knowing the consequences.
Credit Is Not Free Money
This is one of the biggest misconceptions, because when you use a credit card it does not feel like you are really spending any money – you get the goods and still have a pocket full of cash! What could be better, right? WRONG. This kind of thinking is a very big trap that will end you up in a lot of hot water.
The bottom line is credit costs money. When you borrow money you must pay back the principle PLUS any interest charges that have accrued. Therefore, it is really important to make sure your teen understands that every dollar they spend on their credit card must be paid back. And to avoid any interest charges they must pay off their credit card in full each month. Otherwise a $50 purchase could end up costing the $100 or more.
Because it is so easy to spend money on a credit card and not feel the repercussions until about one month later, when the bill is received, it is very easy to get over your head in a hurray. And you want to avoid the trap of revolving credit, where you only make your minimum payments only to reuse the money paid down. By teaching your teens not to spend more than they can pay off each month, will be a life long beneficial habit to instill in them.
One way of doing this is to keep track of all your transactions and set aside the money for when the bill comes in. Using a checkbook register can make this process easy, simply write down the date, place and amount charged. Keep a running total so you know exactly how much your bill is going to be. This will keep you in line if you start spending to much, and there will be no surprises when the bill comes in.
Another idea is to open up a separate savings account. Use this only as a holding account, each time you charge something on your credit card, deposit the exact amount into your savings account. When the bill comes in you will have exactly the amount needed to pay if off in full.
Credit Is Not A Given – It Must Be Established
A credit history is not something that you can get over night, it takes time to do it right, so be patient. Even thought it can take a long time to establish a good credit history, you can destroy it very fast. Once your credit report is damaged, your will have to re-establish your credit, which also will take a very long time. So, be wise and establish your credit slowly the first time. Take care that you always pay your bills on time, do not over extend yourself on credit by going over your limits or charging more than you can pay off.
Applying for to much credit in a short period of time can also hurt you. Lenders call this type of applicant as an “active credit seeker”. For someone new to credit, it could be to tempting to get several credit cards and go on a wild shopping spree. Things will get well out of hand and devastating when the bills come in.
Go Slowly – Too Much Credit Can Be A Bad Thing
The credit card offers will start piling in, offering really cool gifts and special offers just for applying. Do yourself a favor and resist the temptation of applying for every card out there. All you need is one or two major credit cards and that is it. Every time your apply for credit you will generate an inquiry on your credit bureau, and to many inquiries will bring down your credit score.
Understand What A Credit Score Is And How It Affects You
When you apply for credit the lending will review your credit reports. Your credit report is your financial resume. It contains information on your debts, both past and present, how you have paid them, balances, late payments, where you have applied for credit, as well as some personal information like your address, employment and any alias names. This information is managed by credit reporting companies, and there are three major agencies, Experian, Equifax and TransUnion.
These major credit reporting agencies have also devised a system to score your credit report, which will give the lender a good idea of your credit worthiness.
Credit report scores range from 300 to 850. The theory is that the higher your score the less likely you are to default on a loan and the lower the score the greater the risk is of defaulting. In other words, the higher your score the better chances you have of getting credit at the best terms available.
It is in your best interest to stay away from things that will bring down your credit score. Missing payments, late payments, to many inquires, credit card balances at or over the limit, collections, judgments, bankruptcies, repossessions are all considered negative things which will bring down your credit score.
Protecting Your Identity To Avoid Identity Theft And Fraud
I can’t stress enough how important this is. The fastest growing crime in America today and it is preventable on your part by taking some simply steps. If you have ever been a victim of identity theft or fraud, you know how devastating it can be. Whether it is one charge on your credit account or someone assuming you whole identity, it is a long road to recovery.
You don’t want to pay for someone else’s bills so take care and protect your account information and Social Security number. Never give any information out to unknown sources, if you have any doubts, don’t proceed any further. And Always protect your passwords and account numbers.
Credit Can Be Beneficial When Used Wisely
Let’s face it, there are just some things that you are going to have to finance. Most of us do not have the funds available to pay cash for things like a car or your home. So, by choosing to use your credit wisely, you can benefit a great deal. Credit should not be used for everything and anything. Pick and choose, be selective, otherwise you may get caught up in credit and be over your head in not time flat. If you use your credit cards, make sure you are only using what you can pay back when the bill comes in - Wise. By doing this you get to use the banks money for free, most credit cards do not charge you any interest if the balance is paid off in full. However, if you are not able to pay in full, you will be charged interest from date of purchase unit it is paid off in full – Not Wise.
Using money wisely not only includes credit, but all aspect of financial management, including savings. Be open and honest with your teens and make sure to discuss finance, credit and savings basics – this means both the benefits and the pitfalls. You won’t regret it, you will be giving them skills that will pay them for life.
Credit Can Hurt You
Over use and abuse of your credit, will negatively affect your credit score which in turns can negatively affect your life. Lenders will look to your credit report to see if you are able to repay loans. If you have poor credit or a low credit score, you may not get the loan you were looking at or you might be penalized with paying a higher rate of interest. Your insurance premiums, ability to obtain a cellular phone, ability to rent an apartment and some job opportunities are directly linked to your online credit report and scores. Without a good credit history and credit score, your options are severely limited. It takes only one small mistake or missed payment, but that mistake could follow you around on your credit report for up to 7 years. So, think very carefully when using your credit and make sure it is the right decision for you and your future.
Linda Meadley
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