Happy Day to you. This is Ken Kaufman and I am thrilled you’re here for Episode Number 17: Kids and Credit Scores.
To start off, just a quick experience: my oldest son turns 20 years old this month. He’s been living away from home for almost two full years, serving a full time mission for our church. He in doing this has made many sacrifices; he does not have money to spend outside of for the basic needs of groceries and those sorts of things, and is out serving and helping the people where he is headquartered in South Carolina.
Now, I was thinking, as he’s been gone, that he doesn’t have a credit score. And I’ve been thinking about ‘what could I do to help him build up a credit score?’ Well, he’s gone, so that he could come back, and if he, you know, wants to get a credit card or borrow money to buy a home, you know, some time down the road, or even if he needed to borrow some money for education, a credit score would obviously help. In fact, the better the credit score is, it could make the difference of thousands and thousands, if not 10s, and 10s of thousands of dollars of interest paid over the course of a lifetime. And so I started to think about this, started to process through this and then started to do some research about what exactly the options are. And then I’ve taken that and extrapolated it out to look at how can I help my kids in general build good credit. And that’s now turned into basically this podcast, which is hopefully a series of things that you can listen to and hear that will help you think about and prepare for and possibly do some things to help your kids so that they can start to build a good credit score and know how to manage credit debt when they get to that place in their life.
So I know that my kids are probably at some point going to need debt, maybe it’s for school, maybe it’s to buy a car because they don’t have enough cash saved up in order to purchase one used. And again, there’s a circular reference around that, which is, well, I need a job to make money, and when I have the money, then I’ll be able to buy a car. But often you need the car in order to get the job and be able to be reliable, and show up on time for that work. And so sometimes you do need some help to borrow. And then of course, the thought of ever buying a home with cash. In today’s world, that’s very, very difficult. And so most likely a mortgage would be needed. And so I realized, okay, there’s this need. Now what can I do about it?
So here’s a couple of key things to know: First, our children are not born with a credit history. They come, obviously, and they get a birth certificate, they get a social security number, but nothing happens in terms of them actually having a credit score until this: and that is they have either debt, or credit like a credit card. And that bank or issuer reports that activity to the credit reporting bureaus (in any one of them are all three, there’s three of them in total.) But they have to get this experience or have activity where it shows ¨I’ve borrowed money, or I’ve used my credit card, and then I pay that off.¨ Or if I miss a payment, then that gets recorded as well. But all that activity needs to build up to that there’s enough data there so that the credit reporting agencies can then put that data together and issue a credit score. Now, that is important to know–credit just doesn’t sort of amass; our kids start with zero. And at some point, they need to create enough activity so that ultimately they can get to that credit score.
The second thing is that the age of 18 is generally the point in time when banks or credit card issuers will allow our children to engage in any type of debt or credit card facility. And so again, there’s a circular reference around this as well, which is: well my kid needs activity, this debt or credit activity, in order to be able to show that to the reporting Bureau, so then they can get a credit score, but they can’t get that debt or credit facility without having a credit score. So there’s a circular reference there. (I am going to come back and solve that in the next episode. I just want this episode to be dedicated to just what can we do right now in today? And then how do we help them overcome that when the time comes? And how do we find that right credit card to get them started with building up a credit profile, but the age 18 is the cutoff point or the place where once they are 18, then they can go out and get a credit account.)
Now, the next thing to understand is that if you have a credit card now, it’s likely that you could add your child as an authorized user. Depending on who your credit card issuer is, they may have an age restriction or other restrictions around it or requirements. But it’s generally pretty easy. Some will say, Well, they’ve got to be at least 13 years old, or you need to fax in a copy of their birth certificate or email it in; they’ll need social security number, there will be some requirements like that. But generally, it’s not too hard. The interesting thing there is is that starts to marry people’s credit together. So your credit and your child’s credit start to get married together. Now your child will be able to build a credit score. And that would be great.
But there are some downsides to that. And I’m going to get into–also in a future episode about the sharing of credit with family members or even people who aren’t family members and some of the risks around that, some of the ways I’ve approached it. But just to be clear, generally speaking, I do not go down this road of sharing credit with family members or with anyone, I want my children to earn their own credit score, let them stand on their own two feet and let them fully appreciate it. You will ultimately need to decide on what your philosophy around all of that is, and like I said I will get into that in a future episode.
But here’s the other thing that you can do in the meantime: you can teach them how to use credit responsibly, teach them that they should never borrow more money then they can very comfortably afford to make the payment on. Now there are the ratios that show how much money, you know, debt can you borrow, and your debt to income ratio and all of those sorts of things. Well, whatever that ratio is, that’s the maximum how far can they be from the maximum. That’s ultimately the point here, we don’t want our kids to be over leveraged and get themselves into that risky position. And we want to teach them that now.
Also, we want to teach them that we preferably only borrow money to purchase appreciating assets. Cars are depreciating asset. But sometimes there’s a need to do that. But where possible, we want debt attached to only appreciating assets. Education can very easily be considered an appreciating asset because it’s an investment in itself. It’s an investment and ability to earn and generate income, at least that’s how I see it. We also need to teach our kids that credit cards are a tool to make purchasing more convenient, and earn rewards. Credit cards are not a place to go to borrow money, the interest rates are way too high. And it’s the wrong philosophy to think that you need something so badly that you’re willing to go into debt on a credit card that usually has to be unwound and rethought and as they are kids, that’s the time to teach and train them on that.
The next thing is–and this is something I’ve done quite a bit and spent time teaching my kids how credit card works, what the mechanics are, how statement cycles work, grace periods work, all the tricks that they need to know to extract all the benefit of using a credit card, while they can learn to protect themselves from the risks that credit cards can pose if they’re used irresponsibly.
And then the other thing we can work on teaching our kids is, whenever we’re borrowing, we should shop whatever that finance program is to get the best deal. If there are closing costs or fees, origination costs, what the interest rate is, is it fixed or variable interest? What are the terms of the loan, and what are the legal documents around the loan or the credit card saying. All of those things, we shouldn’t just take one put in front of us; we should shop those things, we should find the best bank or the best credit card issuer or wherever we’re borrowing money from; we should find the best deal possible and negotiate fees and rate, and all of those things. It’s not unlike purchasing just about any other thing. Some people just shy away from negotiating these things, because sometimes finance terms can be complicated. And some of these contracts can be complex. But debt or credit is something that has to be purchased. Just like anything else we shop at, we find the best rate, we find the best deal. So all of this is something that I do and have done with my kids. And I’m continuing to lay the groundwork for smart and wise use of debt and credit. And I think that’s also foundational to helping them ultimately build a great credit score.
And I want to really encourage you–do not underestimate the power that you have. As a parent, we have this ability to influence our children and how they see the world and how they interpret the things that they see in here, all around them. And we really have this, I guess I should say it this way: our kids need us to give them unbiased and truthful leadership on everything, but especially money, and especially debt and credit. And especially if we’ve had some bad experiences with it, we need to be open and transparent, help them so they do not repeat those same mistakes. Or if we’ve been successful, we’ve got to pass those things along as well.
So now in the next episode, I’m going to talk about kids and credit cards and especially how that day that your child turns 18, how to make sure that you help them prepare for, select, apply for, and then start using their very first credit card. And I’m going to talk about how it’s going to empower them to start building their own credit, how the process works, and ultimately get their own credit score, one that they’ve earned completely on their own. And I want to make sure to mention that this is the next upcoming episode I’ll talk about; it dovetails right out of this episode, and make sure that you subscribe to the podcast so you don’t miss that one, you’ll find that really, really helpful if you have put any thought into this or have been trying to solve this puzzle of how to help your child build a credit score and ultimately learn how to use credit and debt responsibly.
Now to jump back to my son, so he’s, like I said, he turns 20 years old this month; we have implemented a plan in play and put it in place where it took about six, it was between six and eight months where he got a credit score. And I’ve been able to help him while he’s been away serving on this mission, so that we can get this setup. So when he comes home, he’s gonna have a really good credit score. And it’s not a ton of activity or experience, but it’s enough to give him sort of that first step into continuing to build his credit, and build his experience so that he can successfully manage debt and credit throughout his life. I hope–jury is still out, right. We’re still in the process of learning all about this. I also have an 18 year old son that I’ve just begun this process with, in fact, today, he got that first credit card in the mail and we’re going to get it all set up and again, all that process I’ll talk about in the next episode.
Many, many thanks to you for joining today. This is a wrap for Episode 17. Happy day.
Transcribed by https://otter.ai