Credit is a necessary component of doing business in the modern world.
The credit reporting agency Experian defines credit as the ability to borrow money or access goods or services with the understanding that a person will pay later. Various creditors grant credit based on their confidence that a borrower will repay what is owed.
Many adults learn about credit through trial and error. Financial literacy is not taught in many schools, although lots of people feel it merits space alongside literature, math, science and other subjects.
A recent NextGen study found only 1 in 6 high school students are required to take a personal finance class in the United States.
In addition, a survey conducted in 2018 by Chase bank found only one-third of Americans were taught what a credit score is by their parents.
It is essential that guardians share information about credit with young adults to help them be financially solvent and successful later in life. Here are some ways to help young adults learn about credit.
Start with credit basics
Speak generally about credit and how it is used. Then explain credit scores, credit bureaus and credit reports.
A credit history and credit score is important information for young adults to have early on and check frequently, as having good credit improves the chances they will qualify for loans and earn acceptable terms in the future.
Help them build credit
Having one or more credit accounts can help a person establish and build credit by making payments on time.
Credit card companies often advertise student and secured credit card accounts that come with small or managed credit limits.
Making purchases on the cards and paying them in full every month is the best way to improve a credit score or maintain a good one, says the Consumer Financial Protection Bureau.
Another way teens can build credit is through their student loans. Making small payments on the principal while in school can help establish a strong credit history.
Check their credit reports
The Federal Trade Commission recommends checking a child’s credit score around the age of 16 or 17. This will help families figure out if there are any anomalies that may indicate identity theft or inaccurate credit issues.
Know the formula for good credit
Forbes says there are five categories that add up to good credit:
1. Payment history (35 percent): Always pay bills on time.
2. Amounts owed (30 percent): Borrow a low amount compared to the total lines of credit. This also is known as credit utilization.
3. Length of credit history (15 percent): Keeping accounts open for a long time is a win.
4. New credit (10 percent): Do not apply for too much new credit too often.
5. Credit mix (10 percent): Having a balance of different types of credit, such as car loans, credit cards and other types of debt, is advantageous.
Share your own experiences
Sometimes the best way to teach about credit is to be honest about what a parent or another adult did wrong with his or her finances, and use that as a “what not to do” scenario.
It is important for young adults to learn about credit so they can make smart choices that will positively affect their future. Although talking finances may be uncomfortable, it is vital for families to have these discussions.
