Teach teens all about credit reports

April is National Financial Literacy Month, and it’s a great time to start introducing new financial concepts to your teenage son or daughter.

It’s ideal to teach your teenagers about good and bad credit behavior before they start using credit cards. A credit report can help you introduce the topic of credit to your teens, because credit reports record years of credit behavior, and are used by lenders in considering applications for new loans and credit cards.

When your teens understand what credit information is recorded, how it is used and how their positive behavior is rewarded, they can make informed decisions about how to handle their own credit behavior in the future.

Order or review your most recent credit report. Once every 12 months, you are entitled by law to receive a free credit report from each of the three credit bureaus, Experian, TransUnion and Equifax. The credit bureaus jointly run one official website from which to order these free reports: http://www.annualcreditreport.com. (When in doubt, you can always link to this website from the FederalTrade Commission website, http://www.ftc.gov.)

If you like, you can bring your teen in on the process of ordering a report now. A year or a few years from now, if your teenage son or daughter has a credit card or student loan, you both can order and review your teen’s credit report together.

Go over the credit report with your teen. You can use your own report, or if you prefer, a sample credit report, such as the one available at Experian’s website. Go over the basics behind credit reports, and try to frame your explanations in terms of behavior, so that your teens can take on good credit­ building behavior and avoid pitfalls that leave bad marks on their credit reports.

Here is some basic information you can discuss:

How the information on a credit report is compiled. Many financial institutions report payment activity, balances and other information about your credit cards and loans to the major credit bureaus on a regular basis. Financial information on the public record, such as bankruptcies and liens, also are included on a credit report.

How credit reports are used. Financial institutions and other entities can review your credit history on your credit report in making a decision to approve your application for a new loan or credit card, determine your interest rate, or even send you a pre­approved offer. A positive credit history can lead to approvals for new credit at favorable rates; a negative credit history can leave you with a high interest rate on a new credit card, or a decline of your application.

Paying bills before the due date. Each account on a credit report usually lists payment history by month. These months are noted as having been paid as agreed, or paid 30, 60, or 90 days late. You can discuss how a long, positive pattern of on­time payments is a major factor in building excellent credit and obtaining the best interest rates for a car loan, credit card, or even a mortgage in the future.

You can use this credit report as a launching point for a number of other informal lessons on financial responsibility in preparing your teen for financial independence.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. You can email him at moneymattersguam@yahoo.com.

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