It is so easy for the average 18 year old to get credit today. Walk into any college campus and there are tables lined up with individuals encouraging our kids to sign up for a credit card. As I walked through the community center in one school, I was astonished at just how aggressive some of these companies can be when it comes to getting new sign ups.

As I drove home, I wondered, how could I teach my children that a credit score is vitally important to far more than just getting that credit card? Not only do these credit card lenders use them, but also they are large elements of everyday life for most people. Everyone from your insurance agent to your potential employer could use your credit score to determine if they will work with you. As I thought further about this, I realized that there simply was too many future investments riding on the coattails of the decisions my kids could be making now and in the next few years.

Talking to the Kids about Credit Scores

I decided it was important enough to talk to my kids about this sooner rather than later. What I wanted to find out is what they already knew about credit scores and what they were lacking in knowledge. I brought up the topic of borrowing money. In order to help get the conversation going, start out by asking your kids a few key questions.
What do you know about your ability to borrow money?

The goal here is to determine if your children even know about credit scores and the value of them. Your children may bring up a variety of other important factors too, such as having a job and enough money to pay the monthly bill. However, zone in on the credit score.

Credit scoring helps lenders determine if they should extend credit to the individual, based on the amount of risk the individual poses to the lender. The credit score is comprised of a variety of factors, including the way that you pay bills, the amount of debt you have and the types of debt you have. The combination of your credit usage experience is placed into a complex algorithm that determines what your experience looks like in a number form.

Who uses credit scores?

Once you have established what credit scores are and how they relate to an individual, the next step is to educate your child about who will use this score to make decisions about them. It is often easy to see that lenders are going to use credit scores. To buy a car or to buy a home, you need to have a good credit score, after all. Be sure they are able to correlate the benefit of having a high credit score and getting the right loan (lower interest rates and easier acceptability.)

However, others use this credit score, too. Ask your child if they have any idea who else is able to get a copy of your credit report detailing your credit use and who can use a credit score to make decisions about whether or not to work with them. They may be surprised to learn that more than just lenders use them.

One example that they may not know about is insurance agencies. When you purchase a vehicle, the insurance company is likely to pull a credit report and they will use your credit score to determine if they should provide a policy. Insurance companies often call this a credit based insurance score or insurance scores, but it is very similar if not the same as your credit score. The insurance companies use this information to determine how likely it is that the insured individual will file an insurance claim and the amount of that claim.

In addition, employers sometimes use credit scores, too. There is some controversy over whether or not employers should use credit scores as a tool to determine if they should hire someone, but many do so through the background check. The logic here is simple. If you are having trouble managing your credit use, you may have trouble managing the business’s money or lack responsibility.

It is amazing just how vital a credit score can be, even to those who never actually fill out that application in their student lounge of their college campus or answer the emails they get.

For more information regarding credit scores and your rights, visit the Federal Trade Commission, or FTC’s website at www.FTC.gov.