By Michelle Steffes Member service representative at Dupaco’s Carroll, Iowa, branch Dupaco’s Mackenzie Damm (left) watches as children play with their new tablets provided through the partnership of the Tri-County Child and Family Development Council Inc., Dupaco and the Dupaco…
By Noah Kachelski
Member service representative at Dupaco’s Hillcrest Road branch
When you teach children the value of money, you help set them up for financial success long after they leave the nest.
An important part of those money lessons involves credit. That’s because once your children become adults, their credit scores can be used by:
- Lenders to determine how much interest they’ll pay (the higher the score, the lower the interest).
- Insurance providers to determine their rates.
- Landlords to assess their ability to pay rent.
- Employers to better understand their personal integrity and responsibility.
Credit is tricky, though—the classic chicken-and-the-egg dilemma. It’s hard to get credit when you don’t have a credit score!
So, how do you help children learn about—and establish—credit? For starters, you don’t have to wait until they turn 18. Here are a few strategies to consider to start steering them on the right financial path.
Start credit conversations early.
I think a lot of what gets people into trouble with credit, especially when first getting started, is simply a lack of knowledge. They haven’t experienced the process before and don’t know what to expect.
Talk to your child about how credit works. When you use your credit card at a store, explain how you’ll have to pay off the balance. Talk about how the “real world” uses your credit (see above). And let them know that when they’re ready to begin building their own credit, you’ll be there to help.
You don’t have to go it alone. Consider bringing your teenager into a Dupaco branch for a free Credit History Lesson to learn what will help—and hurt—that credit score. We like going over our members’ credit history reports so they know what’s on their reports and what we’re looking at when we review them.
Have a budget talk.
Before your teenager establishes credit, he or she should create a budget. This will help your child have the money in place to pay off that auto loan or credit card down the road.
We can help with a free Dupaco Money Makeover. We can set up multiple You-Name-It Savings accounts to help your child set aside money for his or her expenses and goals. When expenses are itemized this way, it’s a lot easier to see where that money is going—and a lot more difficult to spend money that’s already been earmarked.
I have eight You-Name-It Savings accounts myself. It helps me budget successfully, so I try to pass that along to everyone I work with.
Consider co-signing an auto loan.
If you plan to take out an auto loan for your teenage driver, consider allowing your child to cosign the loan. You would still be the primary borrower, but your teen also would be linked to the loan.
Here’s why this can be an effective credit-building tool: It will get a trade line reporting on your child’s credit history. And the earlier that happens, the better, because the length of credit history makes up 15 percent of a credit score.
When your child gets the benefit of your positive pay history on the loan, he or she also gets a positive credit history established, making it easier for lenders to approve a loan in the future.
By cosigning the loan, your son or daughter also gains important experience. Your teenager sees what is entailed with taking out an auto loan, learns how much a vehicle really costs (a good lesson on wants vs. needs) and also gets a lesson on how interest works. Money lessons tend to stick a little more when their name is associated with the expense.
Your child has the advantage of learning all of this with Mom or Dad looking over those shoulders to make sure it’s done correctly.
But you know your child best. Ultimately, you know whether your teenager is ready for this responsibility.
Encourage your teen to open a credit card.
One of the best things my parents did for me when I was in high school was help me get a credit card from our local credit union. Once your teenager turns 18, encourage him or her to open a low-limit credit card with a trusted financial institution to further establish that credit.
Equally important is teaching your child how to use a credit card wisely. I shudder to think what would have happened to me if I had gotten my first credit card without my parents looking over me!
It’s amazing how much a credit card can help you when used properly—and how much it can hurt you when used improperly. At Dupaco, we take this very seriously when we help our members open a credit card, because we want to put everybody in a solid financial position.
Talk about the importance of paying off the balance in full, and on time, every single month. It’s really easy to get caught up in minimum payments, which will negatively impact your score. New credit cardholders also need to understand the importance of keeping their balance low, which also plays into that credit score.
If you’re concerned about your teen overspending, you can store the credit card in a safe place. Remember: A credit card not in use is better than a credit card used improperly.
The great thing about credit cards is they can last forever. Every other trade line—whether it’s a car loan, home equity line of credit, unsecured loan or mortgage—has an eventual end date. Credit cards can last the rest of your life, which can make for an impressive length of credit history on your child’s credit report!
Help them monitor their credit.
As you know, once you have credit established, you shouldn’t put it on auto-pilot. Help your child understand the importance of regularly monitoring that credit report and score to make sure everything looks OK.
With Dupaco’s free Bright Track credit monitoring service, your child can access his or her score, along with tools to improve it. Your child also can see the average credit score in your area.
It’s a really cool confidence builder when you can watch that score steadily rise. It means you’re doing something right.