Strong credit and an understanding of good financial management is essential for teens as they make the transition into adulthood. If you want your children to have investment and savings options in the future, then you’ll need to teach them the basics of credit.
Avoiding mistakes early can allow the next generation to be better financially prepared for home buying and any future investments.
These are the four key mistakes that you need to warn your children about.
Never Make Late Payments or Default on a Loan
One of the first things that you need to instill in your children is the benefit of a good credit score. Strong credit should be seen as an asset that can open the door to future investments and major purchases. Making late payments, defaulting on loans, and generally ignoring a credit score are all traps that young people can fall into.
There are consequences for poor financial decisions early in life, so teach your children the pitfalls of bad credit so that they don’t need to learn from their own mistakes.
Don’t Let Teens Take on Too Much Credit
Teenagers who are approaching adulthood will soon find that credit becomes available to them. Even part time working students can find that they are offered significant amounts of credit from opportunistic financial institutions. While new credit cards and loans can be enticing, these could easily become liabilities with the urge to spend being ever-present.
Teach your children to limit the credit that they take on. Most teens and young adults won’t need more than a single credit card. If your child will be taking on a student loan, then this needs to be factored into their future finances. Taking on too much credit early in life can lead to excess spending and potentially crippling debt in their mid-twenties.
Maintain a Good Credit Spend Ratio
Most financial advisors agree that 30% is the magic figure in terms of borrowing. This means that your teen should never use any more than 30% of the credit that they have available to them. This can help to maintain a good credit score, and it also provides a buffer for when your children are ready to step up to a large investment like a home or other real property.
Live Within Realistic Financial Means
Credit cards and loans can feel empowering for young people. After all, credit allows for purchases that couldn’t otherwise be made immediately. Teach your children about budgeting and reinforce the fact that they should never take on more debt than they can afford. Teach them to work towards financial goals, especially savings, rather than borrowing to purchase items that they can’t afford now.
Good financial management skills are not hard to obtain, but you do need to take an active role to ensure that your children are well informed and prepared for adult life. By talking about finances, loans, credit, and potential future investments, you can help your children to develop the right mindset that will allow for financial security and freedom in the future.
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