Credit cards often get a bad rep as another way to hold onto useless debt. People boast about their lack of established credit, clueless that without any credit lines their interest rates on major purchases will skyrocket. A basic example of the benefits of a good line of credit would be when you’re trying to buy a new car:
Person A: Has an established credit line compounded with great credit payment history and therefore is able to buy this hypothetical car with only a 6% interest rate.
Person B: Has no prior credit history or an open credit line and because of that, they’ll be stuck with a hefty 15% interest rate.
I’ll save you the calculations: You’ll end up spending thousands when in reality it’ll come down to a difference in credit history. A great line of credit is the difference in money lenders providing loans to you, the borrower in this case, for property, vehicles, small businesses, etc. Generational wealth becomes a sure reality in the hands of a financially literate family, with a veteran understanding of the value of credit.
There are times when the interest rate on a loan can be so insanely high you could default on a loan, Defaulting will drastically reduce your credit score, impact your ability to receive future credit, and can lead to the seizure of personal property.
It wouldn’t be the best of days.
The credit factors that impact your credit score the most are payment history, amounts owed (Utilization), length of credit history, credit mix, and new credit opened.
Payment history has the greatest effect on your score and is the most important because collections stay on your credit score for 7 years.
Credit card utilization is the balance that you are carrying on a credit card compared to your credit card limit.
Length of credit history is the time factor of credit that cannot be bypassed, and the amount of years your credit line has been open translates to your score. Opening new accounts too often will also lower your average age of accounts and every new hard credit pull is a new inquiry. Adding new credit cards and loans lowers your average age of accounts.
Anyone trying to understand the fundamentals of credit, especially parents preparing for their children’s future, will gain valuable knowledge in BWR’s new credit course for mastering your credit. The link to the sign-up page is down below:
The best way to set your kid’s future on the right path money-wise is to make sure they’re able to become financially independent. An easy way to start your child’s credit line is to just get them a credit card.
Adding someone to your card as an “authorized user” shows that the original card holder’s history appears on the new person’s credit report. Your child wouldn’t be forced to pay monthly installments and for a young adult, this could assist with building a record as a credit card user. This method may not impact your credit score the greatest, but as long as the payments are made timely it’s still a positive.
Young adults without an income can qualify for their own card if an adult with income co-signs the card agreement. If you choose to co-sign, insist on full access to the account since payment is your responsibility.
A secured card requires that the borrower first pay a security deposit. Spending each month is limited to the amount deposited. Without independent income, a child under age 21 will still need you to cosign for a secured credit card.