Achieving financial literacy should be a goal for every American. Adults with a firm understanding of personal finance, credit cards, and credit are more likely to avoid money troubles. And financial education is best started in childhood, before most kids have the power to make independent financial decisions.
Despite the importance of financial literacy, many adults lack an understanding of basic financial concepts, which can lead to bad credit. You can help your kids avoid poor credit by teaching them how to avoid mistakes.
Here are six common credit mistakes you should teach your kids to avoid.
Ignoring Their Credit
It’s easy to ignore your credit when you don’t understand how it works or why it’s important. But monitoring your credit can be viewed as part of being a healthy, productive adult, just like getting an annual physical exam. And if you ignore your credit, you could miss out on getting a credit card, owning a car, homeownership, and more.
Luckily, paying attention to your credit and credit score is fairly easy. You’re entitled to a free annual copy of your credit reports and there are many free credit scoremonitoring tools available.
Making Late Payments
If your kids understand one credit mistake to avoid, let it be making late payments. Payment history makes up 35% of your credit score, and one late payment can cause your score to plummet.
Most creditors won’t report a late payment until you’re at last 30 days past due, but it’s risky just to get to that point. Instill the importance of timely payments in your kids.
Applying for Too Many Credit Cards
Young adults may be tempted to apply to several credit cards as soon as they turn 18. This is a mistake for two reasons. First, a hard inquiry from a credit card application can ding your credit score a few points, so you don’t want multiple hard inquiries occurring at once (especially when you’re just starting out). Second, it can be difficult to juggle multiple credit cards at once when you’re just starting to establish financial independence.
Maxing Out Credit Cards
A higher minimum payment isn’t the only consequence of maxing out your credit cards. Experts recommend using no more than 30% of your available credit at one time. If you go above that threshold, you could be damaging your credit with a high credit utilization ratio. Your kids should keep their credit card balances low.
Defaulting on a Loan
Defaulting on a loan – whether it is an auto loan, mortgage, student loan, or other type – has many consequences that will vary based on the type of loan. Your credit will almost certainly take a big hit, debt collectors may go after you, and you could have your wages garnished as the result of a court judgment. You could even lose your home or have your car repossessed.
Many creditors are willing to work with borrowers before they get to that point. If your children are at risk of defaulting, they should try to work out an alternative solution with the creditor.
Living Beyond Their Means
Loans and credit cards aren’t free money. Frivolously taking out loans and opening credit cards you can’t afford can lead to crippling debt, poor credit, and a lifetime of financial woes. Teach your kids that loans and credit cards are useful tools that must be managed responsibly. You should never buy or borrow when you can’t afford it.