The Key To Your Child’s Heart
In training, a friend of mine and I did a presentation about credit history. I was *shocked* when he shared during the practice demonstration that his credit score was over 800! That’s nearly a perfect score!
How did he accomplish this seemingly impossible feat? Simple. His parents had put a credit card in his name when he was a teen and had paid for gas with it. They always paid it on time, and he used it for gas during high school. Eventually, of course, the son had a FANTASTIC credit score. He can buy a house at a lower interest rate, get an apartment easier, obtain lower auto loan interest rates, and, very importantly, receive cheaper car insurance! Remember, building a credit history takes time.
The point is, you can help your child ten years from now by putting a bill in their name and opening a bank account in their name. Just make sure the account is reported in their credit history.
Okay, so maybe it isn’t a key to their heart, but they sure will thank you later.
HOW YOUR CREDIT SCORE IS CREATED
35% of your credit score is based on your payment history.
Are you paying on time? If you aren’t, this is going to drop your score very quickly.
30% is the amount that you owe compared to your limit (debt to limit ratio).
Try to owe less than 25% of your maximum allotment. For example, if your credit card max is $2000, then you should never have a balance greater than $500. But let’s be honest, you should just pay off ALL balances instantly when using credit cards. Make the card a tool, not a noose, by paying off your charges on the same day.
15% is the length of your history.
Remember my friend with the immaculate credit score? This one area where he has a distinct advantage. Even though this category represents a minority share of the credit score methodology, that 15% feels significant when I have three open accounts, and each is 1-3 months old. compared to my friend’s, who has 10+ years of history on one account, so they all seem longer. This has two parts: you want one credit account to be at least ten years old (#lifegoals), and secondly, the average age of all credit accounts should stay above three years to achieve maximum benefit.
10% is new credit.
Basically, don’t open a bunch of new accounts over a short time span. Try to shop for cars or housing rates in a brief period (about 45 days), because your credit score drops 5 points for each inquiry and stays at those reduced levels for 24 months.
The last 10% is the mix of credit you have.
In the all-seeing eyes of FICO, it’s good to have a mortgage, some installment loan (personal, student, or auto loan), and then some credit cards (revolving credit). However, if most of your credit mix is concentrated in credit cards, then that can be damaging to this part of your score.
Now that you know a few basics, you can improve your credit score up to a perfect 850! Or at least above 750 (which is the highest tier of credit scores) and help future generations to do so also.
What have your parents helped you to achieve financially? Share you story in the comment below!
Personal Financial Planning student at Utah Valley University. Personal Finance blogger at jacobbradjohnson.com
Jacob enjoys ballroom dance, eating authentic Mexican tacos, and counseling fellow UVU students in the Money Management Resource Center on their student loans, and budgeting. He strives to become a Certified Financial Planner designee to help people capture and live their ideal life.