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- KEY TAKEAWAYS
7 facts to consider before talking to kids about credit
What your child learns about credit today could determine the decisions she makes when she has her own credit cards and loans in a few years. But it can be tough to explain how credit works. Here are key facts to consider before you start the conversation.
Chances are, even older kids don’t realize credit card companies charge interest and additional fees that can really add up. Explaining interest to kids can help set them on the right track when they start managing their own credit cards.
It’s easy to see why tweens and teens may think that everything from a car loan to a college loan to a payday loan has the same consequences, since they seem to function by the same basic rules. Parents can explain that the terms of the debt and how the debt is used determine its effect on personal finances.
Mortgage lenders, credit card issuers, banks and auto lenders use your credit score to help gauge their risk in lending you money. With a good credit score, you may qualify for lower interest rates because you’re perceived as a desirable customer and a low risk. Young adults may not know that in some cases, credit reports are also used to assess how responsible you are by insurance companies, landlords and potential employers.
The impact of credit inquiries and negative activity diminishes over time but generally doesn’t disappear for years. Even if you pay off overdue debt quickly, it can take seven to 10 years from the delinquency date for negative marks to be removed from your report.
When it comes to the value of a good credit history, the lessons parents impart today can help kids establish positive habits later. If they’re too credit-averse and use cash or debit cards for everything, they will not establish a credit history and could have a hard time qualifying for a mortgage or car loan. But if they overuse credit, they can easily fall into too much debt. That’s why it’s important to strike the right balance between using credit—but not abusing it.
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