Many parents may have a fairly good idea of how their credit standings work and the best ways to maintain a good credit score, but when it comes to their kids, they may not know how to pass on that knowledge.
The issue for many parents facing this quandary is that they simply don't know how to impart that wisdom specifically. It can be one thing to talk about the value of being responsible with credit and various account types that their kids might have when they are first starting out financially, but entirely another to actually explain exactly how credit scores are calculated and what credit reports can mean for them in their daily lives.
The best advice for how to build credit
Because children and young adults are rather unlikely to have any sort of experience with credit cards, trying to sit them down and explain to them the ideas behind rather advanced concepts like how often they should apply for credit or what their credit utilization ratio means is likely to be extremely difficult for them to understand. Parents should instead focus on broader explanations.
For instance, they might not need to explain to their kids that their history of being able to make on-time payments into all of their various accounts makes up 35 percent of their score overall, specifically, but rather explain that it makes up a large portion, and it is for this reason that they need to try to pay every bill by the due date every single month. The same is true of credit utilization, which makes up another 30 percent of a person's score. Explaining that this is the amount of money being borrowed at any one time viewed as a percentage of the total combined value of their accounts' credit limits is likely to be met with blank stares and little understanding, but saying that it's important to keep debts as low as humanly possible is obviously a much easier concept for even credit novices to grasp.
It's also important to explain exactly what a credit score means for a young adult, but it might not be helpful to parents to discuss this issue with their sons or daughters before their time. As a result, it's probably wise to only sit down with them when they express an interest in obtaining credit, and explain it then. Any lessons imparted with regard to these account types could fall on deaf ears prior to that point. The simple fact is that kids likely won't want to hear about the importance of properly managing a credit card or other type of loan until they actually have one, and trying to explain the issues to an unwilling audience won't be helpful to anyone.
In addition, it might be smart for parents to tell their kids about the difference between a credit score and credit report. There is often some confusion even among adults about which is which, and what information is contained in each. The easiest way to explain it is that a credit report shows all available credit-related information about a person at the time it is ordered, while a credit score takes all the information contained in a credit report and boils it down to that simple three-digit number as a sort of quick reference point for lenders trying to verify not only whether they should be eligible for credit overall, but also what they will pay on those accounts in terms of interest rates and fees over the life of the loan.
Try to keep it simple
Perhaps one of the best things parents who have years or even decades of wisely dealing with credit under their belts is to show kids the right way to manage their accounts by doing it themselves. For instance, keeping a few months' worth of credit card statements and showing kids how well these accounts have been managed, through sizable on-time payments that help keep balances low, is a great visual tool that can help young adults better understand exactly what it takes to manage credit wisely. It might also be smart for these parents to order copies of their own credit reports and credit scores to show their progeny what information is contained on these documents and what keeping close tabs on each can teach them about their own finances.
Of course, parents should also be ordering their credit reports with regularity anyway, as doing so may help them to identify any unfair markings that may be dragging their scores down. Showing kids the importance of doing this, and of possibly working with a credit repair law firm when such entries occasionally arise, may also be helpful in helping them to keep their credit on track going forward.