Dry, lengthy, wordy and boring are just a few of the words that come to mind when trying to read about credit, whether it be credit scores, interest rates or how to build credit. I often wondered why young adults are financially illiterate, and it is because so many adults and parents don’t understand the basics of credit themselves. There are adults who have learned the wrong way, never learned at all, or just don’t care.
[dropcap]I[/dropcap]n the last few years I have been teaching financial literacy in the schools, I have been told that you cannot teach middle school aged children about credit, they are too young and they will not understand it. Let me just debunk that myth right now. Out of all 12 grades I teach, middle school aged students probably understand the concept of credit better than most adults I had as customers when I worked in banking. Credit on a very basic level is quite simple to understand, it is all in how it is explained and delivered. Part of the reason young children understand credit better is partly due to where they are developmentally and socially.
The trick to explaining credit is putting it in a scenario that flows and covers all parts: credit, credit scores, interest, and interest rates. Now please don’t misunderstand me, I am not trying to imply that all these topics are not more in depth once you dive into them. What I am suggesting is that when you teach these definitions on a basic level you are laying the foundation, and then when it is time to get deeper into credit scoring or interest rates, it is easier to follow with the basics covered.
This is one of the scenarios I give to my 7th and 8th graders. I walk into a Subaru dealership looking to buy a new car and the one I find and want to buy is $30,000. The salesman tells me I will have to go see Bob in finance, who is in charge of loans. If I don’t have $30,000 dollars on me, I am going to need Subaru to give me a loan, or in other words, extend me credit. Before Bob considers giving me a car loan he will have to look at my credit report and most importantly my credit score. Bob needs to know how trustworthy I am. Does my score reflect that I pay my debts on time or that I do not pay my debts on time. (We go over the score chart as well.) If Bob deems my score to be really bad, he will not give me a loan. If my score is acceptable and he gives me a loan, he then will determine my interest rate. My question to the kids is this, “If Subaru is going to lend me $30,000 up front, do you think they might want something a little extra in return?” There is a resounding yes from the class. That little extra they want is called interest. Interest in a nutshell means you are going to pay some extra money for someone letting you borrow money up front. Not hard for the students to put that together. My credit score will determine how much “extra” I will pay. If my score is high, my interest rates are lower, and if my score is low, my interest rates will be higher and I will pay a lot extra.
As I said earlier, there is a lot more to cover when it comes to credit scoring; how to build it, how it can be ruined, what affects scoring, what doesn’t, different interest rates for different loan products and the impact of interest, but all that comes later with my students as they continue to progress through middle school and high school. Having that basic understanding of credit, though, will make the more in depth conversations that much easier to understand. Credit does not have to be hard, but it does have to be learned earlier rather than later.
There are so many misconceptions about what actually helps your credit and what hurts it. Many people don’t realize that when they have excellent credit scores (720 and higher) they are in a place to negotiate interest rates with their credit card providers and get their rates lowered. When I was in banking and would talk to my customers about their credit, they would tell me that they had always paid their rent and utility bills (phone, cable, water, electric or internet) on time so their credit should be really good. The only debts that matter to the credit bureaus are those of a revolving or installment nature of money that was lent to you. The only time monthly home bills affect your score is if you don’t pay them and get turned over to a collection agency, and then, believe me, your score will be affected but not in a good way. People sometimes believe they should always leave a balance on their credit card. This is not true; please pay in full if you can. Something I tell my students is that credit is king. When they become adults, future employers will look at their credit score, and if they ever need to rent an apartment or home, their credit will be reviewed. These are just a few of the misconceptions surrounding credit, but when people know the truths around credit and understand that credit can make their lives much easier, financially speaking, we will all be better off.