Kids and Credit: Establishing Good Habits Early
Many parents worry about raising healthy and productive children. This requires setting a good example, and financial issues are no exception. Most children and young adults know nothing about credit and financial success. Establishing responsible habits early will help to ensure your kids’ understanding of credit reports, debt, and everything in between. Money issues are the number one source of stress in the world and the United States is no exception..
- Practice your analogies. When it comes to teaching any subject, it’s all about perception. Translating credit terms into understandable scenarios will help your kids understand the importance of good credit. For example, if you have a child in elementary school, compare a credit score to a report card and a credit report to a year-end review. Explain that paying debt on time results in good scores, while paying late or overspending results in bad credit scores. If your child is older, use their mathematical knowledge to your advantage. If your high school kids have taken economics, discuss the pitfalls of supply and demand as it relates to credit.
- Credit Cards Light or Dark side of the Force? Actually they are both. 30% of your credit is determined by installment and credit card accounts. If you do not have one of each, you can never get your credit up into the 700’s and for sure you will never see the 800’s. Most adults do not know that as you charge your credit cards up over 9.9% of you total limit, you start to lose points. If you had a $100 dollar limit on a credit card, you will get the most points when the balance is between 1 dollar and 9 dollars. Keeping the balance below 10% of the cards limit. As you hit 10%, you lose points, even if you pay on time, again at 20%, then at 30%, 40%, 50%, 60%, 70%, 80%, 90%, 100% and you lose points an eleventh time if you go over you limit. You could have a 300 dollar card with 275 dollars charged, make the payments on time and have a very low credit score since you would be using 275/300 or 91.66% of your cards limits. You lost points 9 times.
- It is not always the best to close a credit card. Your total credit utilization also matters. If you have four $2500 dollars cards, you have 10,000 dollars worth of available credit. If you had $900 dollars charged up on one, you still are only using 9% of your total credit. You will lose some points from the card itself as you have 900/2500 or 36% but your overall credit utilization is under 10%. If you close one of the cards, you end up with 900/7500 = 12%, if you close two cards, 900/5000 or 18% and if you close all but the one card, you would be at 900/2500 or 36%. The closing of the three card moved you from being in good shape to losing points three times. The main decision to make when closing a credit card should be first, can you control your spending. If you have charged up your cards in the past, paid them off and charged them up again without the ability to pay it off in 1-3 months, you may have too much credit. If you are getting late payments because you can’t pay on time, then you may need to think about closing some of your cards. If you are paying on time and trying to build your credit, it is almost never a good idea to close a credit card account. It is also a bad idea to close a credit card account with a balance on it as you lose quite a few points and it counts against your total utilization since you have a balance with no credit line. It is actually the worst situation to be in other than missing payments.
- Compare the good and the bad. A common misconception about debt is that it’s all bad. While overextending is certainly ill-advised, talk to your kids about how debt can work to strengthen their credit report. Borrow another analogy, comparing a line of credit to taking a test at school to prove their knowledge. Similarly, consumers must prove their positive habits in order to raise their credit scores.
- Have some faith. Learning about money, credit reports, and managing debt is a foreign concept to many adults, so give your kids some room to breathe and absorb the information in front of them. While they may run into mistakes early on, the learning process is as vital as the outcome. Talk about credit early. Your kids’ self-sufficiency depends on it. It is always better too have your kids stumble when they are under your roof so you can help and teach versus sending them out into the world without the tools and knowledge they need to succeed.
What if I have already damaged my credit. How do I fix my credit?
Remember, if you get into trouble with your credit, you can Negotiate with your Creditors. It just takes some time and patience and you can be on your way to having great credit again.
Sample Credit Dispute Letters
Sample Credit Dispute Letter sent to Credit Bureaus
Sample Credit Dispute Letter to send to Collectors and Individual Companies
Sample Paid Account Dispute Letter
Make Sure Your Disputes Are Legitimate
Be sure you don’t do anything to make the credit bureaus think your credit report disputes are frivolous. Don’t dispute everything on your credit report and absolutely do not send all your disputes at once. If you dispute the same item more than once, you should give a different reason for each dispute, so the credit bureau doesn’t think you’re sending duplicates. The credit bureau has the right to deem your disputes frivolous and if that happens, the bureau also has the right to reject your dispute.