As adults, credit is so important to our daily lives. You can't buy a home or a car without good credit. Even before you buy, landlords will often check your credit score when you're renting a home or apartment.
Some employers will check your credit as part of a background check before offering you a job. Credit follows us everywhere and establishing good credit starts from a young age. We spoke with Sue Sinnott, Financial Education & Program Development Manager at South Carolina Federal Credit Union about how to help your kids get started on a good financial footing.
1) What exactly is credit?
- Credit is borrowed money, from a grantor (credit union or bank), which can be used to purchase goods or services based on an agreement that the amount will be paid back. Credit is a privilege that may be granted to young adults starting at age 18.
- A credit score is a numerical expression that represents the creditworthiness of an individual, based on a level analysis of that individual's credit files. Lenders can use this measurement as a part of their decision to grant or decline credit and to set credit terms.
- Interest rates can correlate with your credit score. The higher your credit score, the lower your interest rate may be, which will help you save money over time on major purchases.
2) Why is it important?
- Credit is one of the most important things in every young person's life because it will open doors and opportunities if you handle it well. If poorly handled, it will close doors and make the cost of credit very expensive with high interest rates.
- Established credit is necessary to get a loan to buy a house, a car or even to rent an apartment.
- Credit is also important because some employers will pull your credit report before making an offer of employment.
3) At what age should kids start to think about their credit?
- Young adults can enter into credit at the age of 18, but building an understanding and starting conversations around the topic can begin in the early teen years.
4) How can kids establish good credit starting from a young age?
Credit cards and credit in general needs to be approached as a privilege and not a right. Young adults should look at credit as a responsibility.
I recommend that young adults start with a shared secured loan, pledging their own funds as collateral. There is no credit score required to do this type of loan, interest rates are reasonable, and they build credit. I recommend a term of at least 12 months to establish a healthy history of paying on time.
5) What are some things specifically that we do wrong when it comes to protecting our credit?
- The biggest mistake people make is that they don't track their money or establish a budget. Some people get credit cards and don't think about the money they're actually spending because they don't see the cash leave their hands.
6) Should young adults monitor their credit? If so, what's the best way?
- Adults age 18 and older should definitely monitor their credit. First, it helps ensure you haven't fallen victim to identity theft. Monitoring your credit report allows you to find things that maybe reported in error, or that are fraudulent.
- I would recommend visiting annualcreditreport.com, which is a website that will give you one free credit report for each major credit reporting agency every 12 months. I would pull a report from one of those agencies and then, four months later, pull a report from another agency, and rotate so you always have a pulse on what your credit looks like. Your score is not a part of these reports, but the content is there for review. There is no adverse effect on your credit score using this tool.
7) How can parents teach their kids about the importance of good credit?
- Leading by example is one of the best ways to teach kids about the importance of good credit. Sharing what you do to manage your credit is also important. Parents can explain to their children how they manage their credit with examples and terms that their children can understand.
- I encourage parents to take advantage of the free financial education programs geared toward children and young adults offered by their local credit unions and banks. Credit unions are known for financial wellness support in our schools and across the community.
8) If you have bad credit, how can you go about improving it?
- The first step is to really understand your credit situation. Pull a copy of your free credit report at annualcreditreport.com and review it for any reporting errors.
- Next, take a look at your budget and spending habits to find out where your money is going. Find disposable income you can apply toward paying down your debts so that your ratio between your balances and credit limits on credit cards is 50 percent or less.
- If you're carrying a balance on a credit card with a high interest rate, see if you're eligible for a balance transfer to a credit card with a lower interest rate and no annual fee. LCP