Money is an excellent tool to teach kids how the world operates. You can use financial principles to teach them about social issues, too. That’s because money is about values, relationships, choices and self-worth.
One important lesson you need to teach your kids before they leave home is about how to build and maintain good credit. Let’s title this lesson:
Your Credit Past Shapes Your Credit Future
The medical record that your doctor keeps in his office is very important because it shows your medical history. It gives doctors clues about the kind of health you can expect in the future.
Your school keeps records on you, too. Your test scores are in there, your attendance records as well as activities you have participated in.
By the time you turn 18, you will most likely have something similar called a credit file. Credit bureaus will collect information about how you manage your money and if you are “creditworthy.” Credit bureaus keep records on where you live, where you work and your history of repaying loans. They collect the good things you do and also keep track if you make bad choices, which is called “negative” information.
Negative information in credit reports can affect a person’s ability to buy a house and get a good job. It determines how much you will pay for your car insurance. Bad credit can make it difficult to rent an apartment or get a job. Lots of employers check credit reports when deciding who is the best person to get the job. Many people believe that the way you manage your money and handle credit is an indicator for how you handle the rest of your life.
Employers look for people who are on time and can be trusted. The way you handle your money says a lot about your character.
The 3 “Cs” of Credit
There are three things creditors look at to determine creditworthiness: character, capacity and collateral.
Character is defined as your responsible handling of life — past debt as well as your stability in keeping a job and paying the rent. The way to establish character is to stay in the same job and to keep the same address for at least a year; longer is better. That shows you are a stable person.
Capacity is a borrower’s ability to repay based on income and current debt. Lenders want to see that your current income is high enough to cover your current debts, with money left over. They want to know that you earn more than you owe. They want to see a positive “net worth,” which is the difference between the value of everything you own and the amount you owe.
Collateral can be property or other valuables used as security to guarantee the repayment of a loan. Lenders want to be sure that you have something of value that could be sold in case you default on the loan.
Ways to build a good credit history include:
— Opening and maintaining a checking or savings account and never bouncing a check.
— Obtaining a credit card (you only need one), and if you use it, making sure you pay the entire balance each month.
— Paying all your bills on time so that you do not create any negative information in your credit report.
— Check your credit report once each year at AnnualCreditReport.com to make sure there are no errors in it.
Good credit habits begin early. Repaying loans and returning borrowed items in good condition establish lifelong patterns of responsibility.
Never forget it’s a lot easier to build good credit than it is to get rid of bad credit. That can take seven years — and that’s a long time!