4 Lessons You Should Teach Your Child about Credit Score

04-Apr-2018 written by : FSI-Team

You Should Teach Your Child about Credit Score

Parenting is the toughest job. However hard a parent may try, but shall not be able to cover everything. And in the end the missed lessons that the child missed learning from parents could turn out to be a vital one when he is faced with the challenges of the world.

One of the important lessons that must be taught to children is related to finance. While each parent tries to do a good job on this front, an essential aspect of finance is management of credit. And when we talk about this aspect, nothing can explain it better than the knowledge of credit scores.

Akin to grades one gets in school

We all know that the grades are important. Not only do these reflect upon one's capability and mastery over matter but also help in breaking that ice to get the foot into the door for a job. Just like a job is required for one to survive in the world and continued employment (whether one works for someone else or employs oneself) to be able to meet the financial objectives, the credit scores are required to have access to credit and loans. We all know that today access to credit is necessary for one to achieve the set out economic goals. And good credit score not only helps in getting finance facility but it also aids loan at better terms. Lower rate of interest, faster processing and better terms of contract are a few benefits that gravitate towards good credit score.

So to be able to make financial achievements, one need to have good credit score. Given the fact that we cannot survive without loans in today's economic scenario, this has to be the first lesson that the children must learn.

Influences various aspects of life

The importance of credit score is not limited to availability of credit lines and loans. Its influence goes far beyond this. In developed economies this numerical expression impacts the insurance premiums, telecom connections, rentals and even jobs. While in India so far the impact is felt only on the approvals of loan, it is just the matter of time when the scores will directly start impacting the other aspects of life as well. The Credit Information Act gives the Insurance and Telecom sectors access to the bureau data. Apart from these the important entities like SEBI also have the authority to use and contribute to the bureaus.

Given the importance, the children must understand that the scores can grossly impact not only the financial aspect but even other facets of life and thus it is important for them to keep a healthy credit profile.

The 5 Influencers of credit score

Once the child has understood the importance of credit score, the influencers that impact it are to be understood in detail. Broadly speaking, following five factors contribute to the credit score.

  • Repayment behavior
  • Amount owed to lenders
  • Length of credit history
  • New credit
  • Credit mix

There are many misconceptions about the credit score and one of these is that one needs to repay the loans in time to have a good credit score. While the repayment behavior contributes to 35% (largest influencer) and helps to enhance credit score, it is not the only factor. There are other factors as well that need attention in the quest to derive best mileage out of good credit profile represented by the scores.

This is the third important lesson to be taught to children.

Regular check up

Just like physical health, the credit health is also susceptible to elements that would bring it down. Errors and frauds are common and one needs to protect against these perils. Goes without saying that any of these two has the capability to swing the CIBIL score calculation. One of the easiest ways to do so it to obtain the credit reports regularly. This would help in keeping an eye on the reporting or mapping errors apart from taking corrective action in case of issues like identity theft and frauds.



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