It’s that time of the year when high school and college graduation is right around the corner and I get a lot of questions from parents about how their kids can build their credit. It’s been a minute since us parents of graduation age kids had to think about starting out fresh with zero credit, so it’s a great question!
First, this is an excellent opportunity to teach our young adult kids a thing or two about credit and what a credit score is- and how it can help you or very much harm you.
So let’s talk about what a credit score is and why it can be important. In my next blog I’ll talk about the best way to go about building credit!
- There are 5 things that go into a credit score – payment history (are you paying on time), amount owed (this has nothing to do with debt vs. income ratio), type of credit used, new credit, and length of credit history.
- Your credit score has nothing to do with income – it only shows what your relationship with debt is like. Ya’ll know how I feel about debt, right? So that means if you are a millionaire because you won the lottery and paid off all your debt, if you have been extremely irresponsible in the past with your money and debt, your credit score will still be bad because being debt free is only a portion of your credit score.
- Here’s a great way to explain it to our young adult children – remember all those college applications you’ve filled out over the past year? A college does not have to accept your child as a student. The drop-out rate of students affects a college’s “rating” so they only want to accept students who they feel will stick with it and graduate. If your student’s ACT score is low, they are in the bottom fourth of their class and their attendance was shotty, then they aren’t going to be a great candidate to graduate college, and may very well not be accepted to numerous colleges. My oldest son went to a junior college that the government didn’t allow their students to get student loans – because the default rate on the loans were so high for students from that school – WOW! The same goes for credit – a lender (or apartment manager) only wants to lend to people who can prove thru a credit score that they are responsible with money and they won’t default on their loan, or not pay their rent.
- A low credit score (or no credit score) can affect a lot of things in life – the interest rate you pay when you are able to find someone to give you a loan, whether you will have to pay a deposit on utilities, if an insurance company will give you a policy (yes this is true), if a cell phone company will sell you a phone on payments or even give you cell service (yes this is true too!), whether you can get an apartment, and lots of times a job. I had a friend who actually had an employer rescind a job offer because she was at high risk for a garnishee on her wages.
- I would love to tell you to encourage your kids to not go into debt. Like ever. But let’s be realistic, you and I both know that the words sound good because we want the very best for them. But here’s what I will say—teach them to save up for a purchase as much as possible so if they do have to borrow money that it’s a small amount that won’t put them in a bind. Encourage them to buy without extravagance. This teaches them patience to save and also teaches them that going into debt isn’t a small matter that we just do on a whim. Going into debt at a young age – and not being responsible or old enough to handle it because hey! they are still a kid in so many ways, can actually have severe consequences that could take years to recover from!
Take some time and sit down with your young adults to talk about what credit is, how it works and share some good and bad stories about your credit history so they can hear real life examples of what to do and what not to do! Now excuse me while I have a chat with my own 18 year old!