Teach teens how credit and credit cards work

Teach your teens how credit and credit cards work

For teenagers, getting a driver’s license is a rite of passage that comes with freedom and bragging rights.

One of out of three high school seniors uses credit cards, and half of them have cards in their own names, according to a 2006 survey by the Washington, D.C.-based Jumpstart Coalition.

Brian Jones, author of “Getting Started: The Financial Guide for a Younger Generation,” said parents should try to get those teens into the habit of using credit cards wisely.

“Recognize that credit is a privilege, not necessarily a right, for parents and teens,” Jones said.

There’s some danger in the fact that plastic is just how things are done nowadays.

Jones pointed out that 18 to 24 months ago, fast-food restaurants did not take credit cards, and now it’s hard to find one that does not accept them.

“With credit cards, we need to define what’s an acceptable purchase.

Pizza at 2 a.m. may not be justified, but books for a class may be,” Jones said.

Jones said discussing finances shouldn’t be a taboo subject for parents.

“This is like keeping their kids off drugs.

They have to talk to their kids.

You have to lead by example,” Jones said.

For parents, leading by example doesn’t mean all talk.

Jones said, for instance, if a teen wants an expensive toy, parents should teach the teens to save their money they make from chores or other jobs.

When they have the money, the teens can use a credit card.

When the bill comes due, the entire balance needs to be paid off.

“I think it’s a great way to learn a lesson to postpone gratification,” Jones said.

“Teaching them it’s OK to want material things, but you have to pay for it.”

Lucy Duni, director of consumer education of TransUnion’s TrueCredit.com, said that long, healthy credit history is good for a credit score, so it is important to establish credit at an early age.

“The key is to understand the meaning of credit and how it can help in the future and to manage it carefully over time,” Duni said.

She suggested two ways for teens to do that: by “piggybacking” as an authorized user of a parent’s card; or getting a secured card, which is backed by a bank account.

Duni said the typical age to start seems to be between 16 and 18 years old, but some credit card solicitations target teenagers as young as 13.

Experts recommend keeping the card’s limit low — $500 or less.

Learning about credit cards isn’t just about paying the bill on time or even paying the entire balance at once.

“We need to be teaching these kids life skills,” said Mary Beth Pinto, director of the Center for Credit and Consumer Research at Pennsylvania State University.

Young people need to know what a credit report is and how it follows a person throughout life.

Pinto said that while schools, peers, the media and parents try to teach how things work, there are holes.

“What about giving them the skills to learn about managing their finances?”

She recalled an instance in which a college student did not know what a canceled check was.

Pinto said money management should be introduced as early as preschooler, with learning tools such as toy ATMs.

She said developed a game for ninth- and 10th-graders and college-age students called the Driver’s Training Manual for Credit Cards.

It walks participants through using a credit card in different scenarios.

The center’s staff members go to classrooms to work with children about financial topics.

“The whole idea is to get them aware.

These are life skills that these kids need to know,” Pinto said.

“The consequence is an understanding of what the minimum payment is and what it does.

If they understand, then they have to change (their) behavior,” Pinto said.

Pinto said when they go to high schools students use calculators to show how many years it will take to pay item off when the cardholder only pays the minimum payment.

Pinto said the organization also has online games to show teens the consequences of using credit cards.

-Adam

technorati tags:how+credit+cards+work, teach+teens+about+credit

Written by Adam on October 31st, 2006 with no comments.
Read more articles on Pay Your Bills and Personal Finance.

Closing unused credit card accounts can affect your credit score

How closing unused credit card accounts can affect your credit score

Q: Martin B., …We have
heard, however, that closing accounts actually negatively impacts one’s credit
rating! We would greatly appreciate any information you might have (or where to
find information) regarding this matter.”



A: Craig Watts, a spokesman for Fair Isaac, inventor of the FICO credit score, says, “Cutting up or closing credit cards won’t help your score and in some situations it might lower your score, though not by a lot.”

One of many things that goes into a credit score is credit utilization, which is your outstanding debt divided by your credit limit.

If you close a credit account that has no balance, you are reducing your available credit and thus your credit utilization at least on paper.

For people who have no or low balances on their other credit cards “it’s not an issue.

People who have high balances (relative to their credit limits) need to be a little more careful” about what cards they choose to keep open, Watts says.

Greg McBride, a senior analyst with Bankrate.com, warns that “if these open lines of credit represent temptation, that needs to be the focus in terms of which cards you close out.

As to the best way to close a credit account, McBride says, “Do it after the balance has been paid off.

You can call first, especially if you are interested in a counteroffer (such as a lower rate).

Tell them you want it to show the account was closed at the consumer’s request on your credit report.

The next time you get a free copy of your credit report, check and make sure it is listed that way.”

It’s OK, but not necessary, to send the cut-up card.

Just make sure your written instructions include the account number.

technorati tags:what+affects+credit+score, closing+credit+card+accounts

Written by Adam on October 31st, 2006 with no comments.
Read more articles on Credit Score and Credit Score Tips.

Protect your kids from identity theft too

Kids are also targets of identity theft.

This article highlights how to protect yourself and your kids from identity theft.

Here’s an excerpt:

Safeguarding Your Child

Adults are not the only ones susceptible to identity theft. Thieves
also target children. Kids may not discover there’s a problem until
years later when they apply for their first credit card or loan.
Two-thirds of child identity theft is perpetrated by someone the child
knows (usually a relative), but theft of information also occurs from
schools and medical offices. Help your children avoid blemishes on
their credit before they have a chance to get a card of their own! Keep
their birth certificates, Social Security cards and other important
documents in a safe location.

-Adam

technorati tags:kids+identity+theft

Written by Adam on October 30th, 2006 with no comments.
Read more articles on Credit Monitoring and Personal Finance.

Car insurance and credit scores

Hello-

Here’s a good article from the folks at Consumer Reports with an explanation about how your credit score affects your car insurance rates and why.

Here’s an excerpt:

Insurers have long used statistics to determine premiums.

That’s how they figured out that drivers under age 25 have more accidents than older drivers.

The traditional rating factors have been age, sex, marital status, ZIP code, driving record, and three-year history of at-fault accidents.

Insurers determine how much each factor affects the frequency and size of payouts and create a formula for calculating a premium based on your characteristics.

The formula starts with a dollar base rate for each type of coverage, then multiplies, adds, or subtracts amounts based on each of the rating factors.

In the 1990s, Fair Isaac worked with several insurers to test its theory that credit scores might predict homeowners- and auto-insurance claims losses.

Statistical analysis of archived data from more than a million credit files found that 30 of 100 or so items in the reports correlated with payouts.

That finding led to the creation of homeowners- and auto-insurance scores.

A study conducted in 2000 by James Monaghan, a research strategist at Metropolitan Property and Casualty Insurance Company, found, for example, that people whose oldest account on their credit report dated back 25 to 29 years subsequently filed only $60 worth of claims for every $100 of premiums paid over the next three years.

Neither insurers nor the credit-scoring companies that discovered the relationship know what causes it, except to suggest that those with subpar credit are themselves subpar.

“People with a pattern of irresponsible financial behavior and poor credit history have a much greater chance of being in an accident or filing a claim,” says Joseph Annotti, a spokesman for the Property Casualty Insurers Association of America, a trade group.

The American Academy of Actuaries said in its 2004 recommendations to the Federal Trade Commission that “aggressiveness” and “willingness to take risks” go along with a poor driving record.

“The correlation with fraud is striking,” says Gordon Stewart, president of the Insurance Information Institute.

But the Monaghan study, which reviewed those long-standing inferences, says that links between responsible financial management and future expected losses are “unsupported.”

Steven Parton, general counsel for the Florida Office of Insurance Regulation, says, “What they’re really looking to see with insurance scores is who is most likely to file a claim, not who will most likely have an accident.

Read the rest of the article below for tips on improving your credit score and lowering your insurance rates.
-Adam

technorati tags:car+insurance+and+credit+scores

Written by Adam on October 30th, 2006 with no comments.
Read more articles on Credit Score Tips and Improve Credit Score.

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