There has been a lot of controversy on whether school prepares teenagers for real life. High school and college prepare them with a set of very specific set of skills that is usually geared towards a specific career. There are certain things that they need to know that they don’t always cover in school, so it is up to mom and dad to show them the way and teach them these bonus “classes.” Handling their finances is definitely one of them.
When it comes to credit, adults know how important this can be in life. It is what is going to let you take out loans, buy a car and buy a house. However, a teen must be taught how to build credit and what it means to have credit.
Credit Does Not Equal Money
According to the Government of Canada, teaching teens about credit may involve a long conversation about credit cards, and it may be a good place to start. Credit cards are likely the most popular form of payment across the world and the idea of them seems appealing. You just swipe a card, and pay for it later. While this is a great way to earn credit, there is a lot of responsibility to owning a credit card.
If your teenager things they are ready for a credit card so that they can start building some credit, they need to understand the importance of paying off the balance every single month. If they do not pay off the balance, they are likely to accrue interest, and this will affect their credit score. If a teen can not pay off their entire balance every month, than that is a good sign that they are spending more than they can afford.
What Hurts Their Credit
If we are teaching them how to build their credit, we also need to teach them how they could hurt their credit. According to Experian, there are some factors that can greatly affect credit scores, and this is what teens need to know. There is payment history, which is the most important. It is important that a teen maintains a good record of paying their bills, and that by just missing one payment can have a large impact on their credit scores.
Another thing that can severely impact a credit score is having too many credit accounts. If a teen thinks they can beat the system and have more than one credit card, than this can hurt their credit. If a teen has too many accounts or applications, they can be seen as a financial risk.
Credit Myths To Clear Up
Just like with most things in this world, there are myths about credit that your child may have heard through the grapevine that mom should be clearing up. One of the most common myths is that checking your credit can affect it. According to TransUnion, this is not true. In fact, it may be beneficial to teach your teen to regularly check-in with their credit so that they have an understanding of where they are financially.
There is a misconception out there that if you at least make the minimum payment on your bills that your credit score will be fine. This is not true and teenagers should be encouraged to make large payments, well above their minimum payment. Credit companies look at the amount of debt owed and not the amount that has been paid. If you can get the debt paid down, the credit needle score goes up.
Sources: Canada, TransUnion, Experian