Help your Teenager Understand Money & Build Good Credit Habits
Graduation time is here–and it’s a great time to talk with your grads about establishing credit. Here’s are a few tips from NHFCU’s Polly Saltmarsh, Vice President, Financial Services & Marketing, to help you learn a little more about helping your teen be responsible with money and establishing credit.
1) First, we need to be clear – a person must be 18 to legally sign a contract. Once 18, your child can begin establishing credit.
2) Before age 18, teach your teen the concept of “living within your means.” Perhaps begin with an allowance and a Choice Checking account with a debit card. Have your teen “manage” specific expenses through the account. These accounts typically have no additional costs based on student status or age. There are no fees for checking at NHFCU for those under age 18. As a parent, you can even “direct” funds from your account to your child’s checking account using auto transfers.
3) Make sure teens understand what “credit” is and how to use it responsibly. While credit or borrowing is often necessary when buying big-ticket items, borrowing money comes with a cost and a monthly payment! Be sure to discuss affordability and good and bad uses of “credit” with your teenagers before embarking on building credit.
We live in a society where young consumers have been raised in a “buy now/pay later” environment. We focus on monthly payments, so items seem more affordable than they really are. How many college grads can really afford a high-end car with a $700 car payment right out of the gate? Teens may be easily lured into buying items that are not as affordable as they appear. Talk about this with your child. Did you make mistakes? Talk about them with your child as well.
4) Moving beyond the “debt” and affordability side, managing credit is important. Credit scores (numerical summaries of credit history) are used to measure the risk associated with lending to someone and can dictate the interest rate charged for a person’s loan. In addition, credit scores may be reviewed by potential employers, landlords, insurance companies and more to determine a person’s eligibility for employment, tenancy, and more.
5) Eighteen-year-olds can establish credit in a number of ways – and some do not require a “co-signer.” Here are a couple of ways to get started, including my personal story.
When our eldest son graduated from high school, we wanted to do something significant for him. We decided to purchase a scooter since he would be taking classes locally. However, because we wanted him to take some “ownership” and responsibility for the purchase, we provided him with the scooter on graduation day and met him halfway. We paid for the first half of the scooter. The second half he agreed to pay for; but not outright. Instead, he borrowed against his savings account so he could begin to establish credit in his own name. He used some of his graduation money from family members and other funds that he had saved over the years. After twelve months of making payments, he had established credit and did not require a co-signer to purchase his first car.
In technical terms, the loan he received is called a share-secured loan. If you have money in your account and you want to make a large purchase, but you really do not want to divest your savings, you can secure a loan with your own money. These loans receive automatic approval – no income check, no credit check – and they are terrific for building or rebuilding credit.
The financial institution “freezes” the savings balance securing the loan. With each payment, some of the savings becomes available for use again. While repaying the loan, the savings account earns interest so it’s a win-win-win: a person earns interest, establishes credit, and the financial institution has a “secure” interest in the loan.
Another suggestion for parents: If you are thinking about buying a car or making a large purchase for your child and plan to pay cash, approach it differently. Open an account in your teen’s name with the money you planned to spend. Have your teen borrow against this savings and pay it back making monthly payments – he/she will be building credit! It’s a double-duty gift. (Remember, the teen must be 18 or over).
If you’d like general information about financial wellness, our Centers for Finance & Education offer webinars on a host of financial wellness topics – budgeting, credit, car buying, home buying and more. The webinars impart practical lessons and are open to the public. We encourage family attendance. It’s a great way to get the discussion moving in the right direction. Visit our website at nhfcu.org and click on our Centers for Finance & Education tab to see our webinar calendar or call (603) 224-7731, ext. 330 today.