As a mom, you play a vital role in preparing your teen for the day they leave home. It might feel like you still have plenty of time before that happens, but their first day of university is sooner than you think.
Before they arrive on campus, you need to make sure they understand how credit can work to their advantage.
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After all, there’s a good chance they’ll need more than a student loan to get by. Most teens take out a credit card, line of credit, or an additional personal loan as they grow up.
So how can you be sure they’ll use these financial tools properly? Start talking to them today about credit. You can use this guide to help empower your teen to make informed financial decisions.
What Does Credit Mean?
Credit has two meanings in the financial world, so it’s important you define both.
1. Credit as Today’s Borrowing Opportunities
First and foremost, credit is borrowing money with the promise to pay it back later. Specifically, it refers to the financial products that your teen might one day borrow, including credit cards and lines of credit.
People rely on credit for a variety of reasons. It can help someone afford one of life’s biggest purchases, like how a student loan can help your family afford your teen’s university. It can also help someone handle an unplanned expense when they don’t have the cash on hand, like when your teen breaks their laptop on campus.
Just like when borrowing a book from a friend, credit means borrowing something now and returning it later. With this expectation, you need to determine how much you need to borrow and make sure you can afford to pay it all back according to a lender’s schedule.
2. Credit as a Reflection of Past Borrowing
Credit may also refer to your teen’s eventual history as a borrower. It might be easiest to explain this concept by showing your credit report and going through this document line by line. They can see how individual loans show up in your file and what affects your score.
This line-by-line look is also a good opportunity to pivot to how a credit score is calculated. Next, you can teach them how to improve their score once they start borrowing.
“But mom, why do I need to care about my score?” your child might ask. You can let them know that this three-digit score may influence how easily they can get a loan in the future.
What and When Should They Borrow?
Debt is something they should be cautious about going into, so you should discuss why someone might borrow.
You can use your own line of credit as an example. Maybe you applied for this account so that you have an added safety net to beef up your savings. You can show how you’ve drawn against this account for help when an unexpected expense surprised you and your budget.
That said, discuss alternatives to borrowing to help them understand their options. Sometimes, postponing a big purchase is the best idea, especially when it comes to non-essential items. For instance, an installment loan may help them afford an unexpected car repair, but it isn’t the best idea for upgrading a lease to a luxury sedan.
These real-life scenarios help your teen understand the practicality of credit and its potential impact on their lives. More importantly, these conversations will equip them with essential financial knowledge they’ll need when they leave home.
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