Talking to Teens About Credit

We are currently in the process of buying our next home, which has been a great learning experience for our children. Before we applied for our new mortgage, I ordered copies of our credit reports, and we were surprised to see an error on my husband’s! Although we have never lived in Arizona, there was a recent cellphone company reporting that he hadn’t paid a bill for a phone number originating in the southwestern state. It took a few phone calls and a letter to each of the credit bureaus to have this error fixed, and our kids heard a fair bit about credit scores and what they mean.

If you have pre-teens or teenagers, it’s not too early to start teaching them about the importance of credit. It’s also a good idea to make sure that your own credit habits are setting a good example… or, if they’re not, to be able to explain to your kids how they can avoid some of the pitfalls of not using credit properly when they’re young. Here are some tips to pass along:

• Every time you have a credit card, a loan, a utility bill or a doctor’s copay, it’s very important to pay it on time. If you don’t, call the company as soon as possible in order to work out a repayment plan. If you pay a bill more than 30 days late, it is likely to show up on your credit report. While many people have one or two late payments somewhere on their credit reports, it’s very detrimental if you have limited credit to begin with, or if more than a couple payments have been late over the course of several years. Show your kids how you keep track of when bills are due, whether you rely on electronic debits, pay bills monthly or use some other method.

• You can check your credit for free. Each year, you are allowed to view and print a copy of your credit report from each of the three major credit reporting agencies, which are Equifax, Experian and TransUnion. Go to annualcreditreport.com to request these reports. It’s recommended that you do this every year in order to catch mistakes, because errors are known to happen. It might be something that catches you off guard like the error on my husband’s report, or it might be that a creditor didn’t apply a payment that you made on time. It’s better to catch these mistakes before you try to apply for a mortgage or a car loan!

• Using up to your maximum limit on a credit card lowers your credit score; creditors want to see that you have some credit available and that you’re using credit responsibly. Another thing that can lower your score is applying for several different credit cards or loans in a short period of time (there is an exception for mortgage-shopping; you can apply to several of these within a two-week period and still be okay). Encourage your teen NOT to apply for credit cards willy-nilly; when the time comes that he’s ready for a credit card, help him choose one with a low annual percentage rate and, preferably, at least in the beginning, a low credit limit.

• Consider signing up for a service that helps to prevent identity theft. While looking at your credit report every year can help stave off identity theft before it gets too far, there’s a chance that theft can happen right after your yearly perusal. A service like LifeLock can help you by alerting you whenever there is a concern. If you are considering something like this, use one of our LifeLock coupons to save money on this valuable service. This is especially good to attach to your kids’ credit reports, as often thieves target children’s unmarred credit, and you might not find out until years later.

Credit is a difficult topic even for adults to fully understand, so it’s good to start explaining how important it is when your kids are young, as well as to set as good an example as possible, so that they follow in your footsteps.