When should you teach your children about credit reports?
Kids need to have a good understanding of their finances, including their credit file. But when should you teach them about it?
There are many financial lessons you need to teach your children – the value of a dollar, the importance of saving – but one that is often left by the wayside is the existence of their credit reports. A credit file is an important part of your financial footprint and it has a huge affect on your ability to access credit. This is especially true if you aren't a responsible borrower when you're young. But how young is too young to teach your kids about credit? This guide will shed some light on the subject.
What age should I start teaching them?
- As young kids. If your child is young it may be a little too early to bring out your credit file and explain how it works, but it's never too early to explain the importance of properly managing their money. If they receive pocket money, you can use this allowance to demonstrate how an income can be saved. If they ask to borrow money, you could also explain how interest works. Teaching these money lessons early will pay off later.
- Teenagers. You have several opportunities to show how important credit files are during your kids' teenage years. If they have a postpaid mobile phone you can explain that this is a credit contract and if the bill is paid late it can affect your own credit history (if it's in your name). If they have a bank account linked to a debit card you can explain to them the difference between debit and credit cards, and how credit card repayments affect credit files. You can show them credit card bills to explain how minimum repayments and credit card limits work. This will prepare them to properly manage their own credit products.
- As young adults. This is the age that your children will be likely to start applying for credit. Once they're young adults it's important they have an understanding of how different financial products work and what effect applying for and repaying these will have on their credit files.
What do they need to know?
No matter what age your kids are, they should have a good understanding of each of the following.
- How to build up their credit history. Not everyone over the age of 18 automatically has a credit file, and some people remain "credit invisible" for some time in their adulthood. However, when it comes to buying a home or accessing any type of credit (car loans, personal loans, in-store finance) it's important to build up some sort of credit history. This can be done by getting a low limit credit card and paying down the balance each month, getting a postpaid mobile phone contract or even an in-store finance deal that's paid off before the interest-free period ends.
- An understanding of "good credit" and "bad credit". Bad credit is much easier to get into than out of. Make sure they know that any credit contract they enter into comes with responsibility, and if they make late payments or default on the payments (even if it's on a mobile phone contract) it will affect them for the next five years because of their credit file. Good credit listings created by making repayments on time and other good borrower behaviour will help them keep a clean credit file and a obtain higher credit score.
- How different credit products work. Having an understanding of the different credit products, such as personal loans, car loans, credit cards and store finance deals will help them make more responsible decisions that will positively impact their credit file.
- How to order their credit file. Explain how a credit file can be ordered and where from. You can learn more about credit reporting bureaus (such as Equifax) in our guide and explain that they can order a free credit file once a year from these bureaus. Credit files can also be ordered for free if they've been rejected for credit in the previous 90 days. Otherwise, they can pay a fee to have their credit file sent to them in one business day.
Tips for teaching the value of a credit file
Your credit file affects your ability to access finance. If you have any negative listings, such as defaults, credit infringements, late payments or multiple credit enquiries, you may not be approved for credit or you may have to apply for "bad credit" products with higher interest rates and fees. This is why it's important to make your children aware of the importance of keeping a clean credit file before they turn 18 and can apply for loans themselves.
Here are some points to touch on when teaching your kids about credit files:
- How long information stays on your credit file. If you explain how long bad credit listings remain on your credit file (up to five years for default listings) it shows how long bad credit can affect their lives. Five years, or seven years in the case of other listings, is a long time not to be able to have access to standard loans and credit cards.
- Mobile phone contracts. Often, young people fail to see how their actions can affect other aspects of their lives. By explaining that a bad credit history can affect their ability to not only borrow money but also get a mobile phone contract, it may encourage them to be more mindful of their credit file.
- Shopping around for credit. Every time you apply for credit it will be listed on your credit file, and it's important that your kids understand this. Shopping around for a deal is important but applying with multiple lenders will damage your credit file
- The age of your credit file matters. While you don't need to get a credit file as soon as you turn 18, the age of your credit file does have an affect on your risk as a borrower. The longer you've been a good borrower, the less of a risk you'll appear to be. If your child is in their early twenties and don't have a credit file this won't matter as much to lenders, but if they're reaching their mid- to late-twenties and are still "credit-invisible" it may be worth applying some strategies to get a credit file. This will make it easier to apply for a home loan, personal loan or any other type of credit when they need to.