19-Jul-2017 written by : FSI-Team
We are living in a world where there is rampant credit usage. However, to access credit at competitive rates of interest, one needs to have a good credit score. To build and maintain credit from an early stage in life is thus of utmost importance. Not only should we strive to improve our own credit score, we inculcate good financial habits in our children right from the start. If you have children who are in their teens or are in the cusp of adulthood, you can in fact help them build a good credit score from scratch. Here is how to do it.
This is where it all starts. As a parent, you should not try to protect your children by keeping money matters from them. On the other hand, you should be open about your finances and financial habits. Talk to children about responsible credit usage and what are the things you do to maintain a good score. Not only will you make them worldly wise, talking about stuff like this is also a great way to bond with your kids.
To establish the importance of good credit habits, you should practice before you preach. Maintaining a good credit score is no rocket science. It is all about consistency. All you need to do is, access only the amount of credit you need and be regular with your repayments. It is also important to keep your credit utilisation ratio below 30%. Simply put, your credit utilisation ratio is the amount of credit you use as against the total amount made available to you. Lastly, make sure you keep a good credit mix, i.e have a good balance of secured and unsecured loans in your portfolio.
Once you are confident that your children are fairly responsible about finances, you can consider giving them an add-on card. An add-on card makes them an authorised user but you as a primary card holder still hold the reins of the card. An add on card is an additional credit card that has all the features of the primary card.
While handing over an add on card to a dependent family member (your child in this case), you need to ensure that he uses the card prudently. Any reckless spending on the card will have an impact on your credit score. Therefore, not only should you ensure that your child uses the card well, but make it a point to go through the card statements together to analyse the spending pattern and if there is scope of improvement.
The other way to get your child a good head start with credit usage is to hand over a secured credit card. This is a card that is card that is issued against an asset such as a fixed deposit and the credit limit is a certain percentage of the fixed deposit. Of course, in order to make your child the primary card holder, the fixed deposit should be in her name. The advantage of secured credit card is that you can cap the credit limit as per your wishes.
On the one hand, you give your child the autonomy to use the card and build a good CIBIL score from the beginning, and on the other you ensure that in case she bites off more than she can chew the fixed deposit would take care of the repayment. However, you must ensure that things do not come to this stage. As a parent, your responsibility is to convey to your child that a secured credit card is a terrific opportunity to build a good CIBIL score from scratch and should be treated as such.
This is an important part of credit education of your children. Teach your children to read the credit report carefully. Often, credit scores take a hit because of the errors and discrepancies that enter it. Regular vigilance of one's credit report (at least twice annually) can help you ensure that your credit report remains error free. With CIBIL, India's premiere credit bureau now allows all borrowers to access one free CIBIL report in a year. It has become even easier to keep track of your credit score. Your children should know that just maintaining a good CIBIL score is not enough, one should also keep a check over one's credit report to ensure financial health is in order.
Good financial health is as important as good physical health. As parents doing your bit to ensure it will give your teenage kids a good head start and an opportunity to build good credit at an early stage.