When To Establish Credit

If you were to think back to your earliest childhood memory, you would probably have to admit that your concepts about money were far from reality. Money for most children just a few decades ago was that funny green paper that Mommy and Daddy gave to people when they got us things. Children of yesteryear tended to have no concept about where money came from, only that it seemed unlimited and easy to get. As that generation of children grew older, you may have started making the connection between money and work, if you received an allowance. But credit cards generally remained a mystery to us, reserved for those grown-ups who still controlled the invisible money tree that we were sure was around somewhere! The world of finance is much different for the children of today. Many kids are acutely aware of the use of credit cards and since many are growing up in two-career families today’s money savvy kids understand the terms: salary, bonus and credit cards. This leads to a different parental challenge than parents faced before when do you introduce your child to the uses of credit and most importantly when do you help them establish credit? Since the use of credit has become vitally important in today’s financial world how do we help our children start out on the road to establishing good credit histories of their own? Most experts recommend that by laying an early foundation of financial knowledge with your child most teens are ready to begin establishing credit to help them on the life path ahead. So if you are concerned about helping your child establish credit here are some ideas on how to help him or her develop the financial responsibility needed to handle credit in the future.

• Start teaching financial responsibility early. If your child is curious and you have a chance to explain what that card in Mommy’s purse does, take it. Use simple language, but explain that this card is like a promise to pay someone back. You will also want to stress that if Mommy doesn’t keep her promise, the other people may not allow her to get anything else. So Mommy only uses her card when she has to. Children can easily relate to promises, so establish the idea that credit is like someone trusting you to pay them back when they give you money.
• Older children should be encouraged to spend wisely. If your child is receiving an allowance work with them to make sure they are spending within their means. This help reinforce the idea of fiscal responsibility which is key to managing credit. Encourage saving and explain the idea of credit as a way to save and then pay things off. Discourage the idea that credit is simply “free money”. This will help prepare your child for the right time to begin establishing credit. Also you may try to introduce them to credit by buying a new bicycle or other high-ticket item, for them with the idea of taking some of the money out of their allowance for a certain amount of time. This may be the best way to introduce the idea of credit to a growing child. This exercise can encourage financial responsibility in your school-aged child.
• Help your teenager get credit established. As paper routes and allowances ultimately give way to part-time jobs and babysitting, your child will need your financial guidance more than ever. Be up front with them and explain everything you have learned from your own credit experiences, both good and bad. If you feel that you can show them your bills and explain the idea of carrying balances and minimum payments. Teenagers should be able to understand interest rates, and be able to understand how a $15 sweater bought on credit may become a $25 sweater later. This can be the right time depending your teen’s maturity to take them to a local department store to fill out their first credit card application. If you are comfortable with the responsibility, then co-sign the application. Make sure that you are clear about the role of a co-signer, so your teen won’t be tempted to run up excessive credit under the belief that you will pick up the pieces. Once they have opened a charge account, encourage them to establish credit by buying an affordable item and paying it off quickly. Overdue payments should not be tolerated. If your teen shows restraint and maturity in this credit step forward than many parents will move on to co-signing a car loan.