Second Only to the Parent-Child Discussion of the Birds and the Bees (What Every Young Adult Needs to Understand About Credit Scores)

If I had used the title with Credit Scores first, I would have lost half of my readers before the end of this paragraph. And yet I firmly believe a parent-child discussion of credit scores, especially if the child is 18 +/- years of age, or irrespective of age is just beginning to use credit cards, is second in importance only to “the talk” about the birds and the bees. Also, it is less awkward. Moreover, the credit score discussion is especially crucial if the young adult is heading off to college or a junior college as an incoming first year student—away from parental oversight and where there are at least two great opportunities for them to screw up. First, flunk out of school. Second, fail to manage the payments on their two or more (probably recently new) credit cards properly and/or to make their apartment rent payments in full and on time, if they live off campus. Such a failure is the equivalent of flunking out of the financial system almost before you get into it. Many adults are not even aware they have their own credit scores. Nor do they understand why credit scores are important. Unfortunately, these topics seem more arcane and complicated than they are, because most adults pay the minimum on their bills on a timely basis and never really have to think much, if at all, about their credit score or credit reputation. No doubt they have an established set of good or very good credit scores that don’t change much over time. For them, ignorance is bliss. In sharp contrast, young adults comprise the group most in need of understanding the significance of building and maintaining good credit scores. They have short track records at best in terms of using credit cards and making rent payments, or being responsible for any of the other things people do to demonstrate their ability and willingness to pay their debts on a timely basis as scheduled. More likely than not, credit scores for young adults are fragile and volatile, both of which give lenders and landlords heart palpitations. I am writing this essay to help parents (who don’t want to think about credit scores) sit down with their young adult children, especially ones who are college-bound this fall (and have zero interest in credit scores now that they have their new credit cards), to have a heart-to-heart discussion of reasons why they should pay their full rent and at least the minimum required on their credit card bills, every month as scheduled. There is no minimum monthly payment on rent like there is on credit cards. Full payments on rent are required every month. In contrast, on credit cards borrowers do have an option of making minimum monthly payments equal to a small percentage of the total amount owed. Because payments appear to be private matters between the borrower/lender and the tenant (renter)/landlord, young adults not totally familiar with how the system works might think they can pay less than the minimum amount due, or not pay the rent on time, or skip a payment, and no one will know it other than the party not receiving what is owed to them. Not true. The party getting stiffed (especially if more than once) will report the derogatory information to one or more credit bureaus, and the resulting reduction in your credit score will damage your credit reputation and credit worthiness, possibly for several years to come. There are many on-line resources for detailed discussions of credit reputations, credit scores and how to get free copies of your credit score annually. Three informative ones are https://www.myfico.com, thebalance.com//how-to-read-your-credit-score, and Experian.com. I can’t emphasize strongly enough how important it is for young adults—your nephews and nieces, children and grandchildren-- to understand the importance of establishing credit histories demonstrating their ability and willingness to make principal and interest payments on their debts on a timely basis, as scheduled. As counter-intuitive as it sounds, needing a credit history also means not paying cash for everything, because cash does not help establish a credit history. Here are some easily understood key reasons for building up a good credit reputation, as measured by a credit score: 1. Lenders use credit scores to assess the risk borrowers might pose when buying a car or home, or obtaining additional credit cards or higher limits on existing cards 2. Some employers review credit scores to help them assess a prospective employee’s sense of responsibility 3. For renters, (e.g., students living off-campus), landlords use credit scores to help estimate the likelihood you will be able or willing to pay rent on time 4. Even insurance companies like to see credit scores at times. If they sell you something it may well be expensive, and they dislike having to spend time, effort and money trying to collect monies owed from customers who failed to make payments on a timely basis If you can read this essay, you have several credit scores whether you know it or not. Numbers range from 300 (try not to go anywhere near here) to 850 (you don’t need to be perfect, either), but somewhere in the 700 – 760 range is flirting with a good/very good rating and makes a good target for a long-term number. Higher is better, lower is worse. If your numbers get too low, traditional lenders and credit card providers will not extend credit at all, or if they do it will be at a high/expensive rate of interest. In those situations where lenders quit providing credit entirely, a borrower’s only option might be what loosely is called a “hard money lender”. If this happens, the borrower’s interest costs will increase dramatically. And a borrower is well advised neither to complain nor to fail to make payments on a timely basis when dealing with a hard money lender. Popular lore has it that complaining and late payments may pose risks to the retention and functionality of your fingers, toes and/or knees. At age 18+/- children may need to ask their parents to co-sign credit applications or apartment leases, meaning the parents promise to make good on any payments not being covered by their children. In effect, the child “borrows” his or her parents’ credit score in order to benefit from the parents’ credit reputation while building their own. Because paying cash for everything does not build a credit history, as I mentioned earlier, young adults should obtain a couple of, or at most three credit cards with limits high enough to cover expected expenses but low enough to avoid over-burdening the parents even if the scoundrel child max’s out the limit and fails to make any payments. A common saying for co-signers getting stuck paying for others is “No good deed goes unpunished.” It is extremely difficult to compress information about credit reports, so I apologize for the length of this essay. Please also do check out other sources for on-line details, many of which I was unable to cover because of space limitations. Mark J. Riedy, PhD September 10, 2021 markriedy341@gmail.com