Helping your heirs manage credit wisely

We all would like to see our children or young adults in our extended family become financially successful. We celebrate if they get into a good college or secure a high-paying job. But one aspect of their financial lives can be overlooked — their ability to manage credit wisely. If they don’t learn the skills necessary to understand both sides of their balance sheet, their long-term success can potentially be derailed.

Parents may notice their children using credit cards with abandon, living beyond their means, and accumulating debt rapidly — sometimes at the detriment of the parents themselves, too.

Responsible use of credit can shape financial independence, present additional opportunities, and protect against common financial pitfalls. By teaching teenagers and young adult family members how to manage credit, you’re not just helping to secure their financial future, you’re helping empower them to thrive.

Money management discussions may be difficult, especially if you are talking to a young adult who has abused their credit card privileges, your online accounts, or potentially spent money unwisely. You may want to avoid times when tempers are high to have money discussions. Instead, find a time when you can sit down and talk calmly and positively about borrowing.

Consider highlighting these five key lessons:

1. Understand how credit works

Before your heirs can begin managing their credit, they should understand what it is and how it works. A simple explanation you can supply them with is that credit is borrowed money that must be repaid, often with interest. A person’s credit score typically ranges from 300 to 850, reflects their recent credit history, and can have an impact on what they can borrow at what interest rate in future.

• Credit scores: Explain how credit utilization, credit history, and other factors can impact their score and how they can potentially raise that number.
• Credit reports: After showing your heirs how to access credit reports, teach them how those reports can be used to check for errors and signs of identity theft.

2. Build credit early and responsibly

Establishing credit early in life can provide your heirs with a foundation for financial growth. However, it’s important they learn to build credit responsibly. Here are some actions you can take to encourage this behavior.

• Authorized user accounts: Adding a young adult to your credit card account can help them build credit under your supervision. But make sure you lay down ground rules on what and when the card can be used, and if they should ask permission before they use it. Hold them accountable to these rules.
• Secured credit cards: Opening this kind of credit card only requires a small deposit and can help show children what responsible credit usage looks like.
• Timely payments: Be sure to stress the importance of paying bills on time to avoid late fees and potential damage to their credit score.

3. Use credit strategically

Despite what some people may believe, credit is a tool that can be used to leverage financial opportunities – but only when used with careful consideration.

• Debt-to-income ratio: Show your heirs how to avoid overextending themselves and borrowing beyond their means.
• Strategic borrowing: Demonstrate to your heirs that credit isn’t only used for impulsive purchases. Instead, borrowing can be used as a tool to help with some of the biggest purchases they’ll ever make, such as a car or a home.

4. Avoid the classic credit pitfalls

Explain to young adult family members how they can avoid the most common mistakes.

• High-interest pitfalls: Explain the impact of compound interest to demonstrate why credit cards with high interest need to be paid off as soon as possible.
• Maxing out: Show them how to set up credit alerts to keep credit utilization below 30% whenever possible and avoid maxing out their credit card.
• Paying only the minimum: This is a common mistake that can result in significant interest charges over time.

5. Plan for the unexpected

Though this may sound like a logical paradox, we all know how unpredictable life can be. Financial challenges can be lurking around any corner, so help your heirs prepare for these moments with smart credit management strategies.

• Emergency funds: Rather than relying on credit, we believe it’s wiser to have savings to cover any unexpected expenses in the future.
• Credit flexibility: Teach your heirs to think of credit as a safety net that can be used only when most necessary.

Family relationships can be fraught with emotion and sometimes, even with the best of intentions, any type of money discussion may not go as expected. If this is the case, talk to your financial advisor about tools that can help. We also recommend visiting our Financial Education 101 website, where a wealth of information is at their fingertips.