Teach Kids About Borrowing Money
The Importance of Having Good Credit
It's important to have good credit, and this is something your child should aim for. The reason is simple: Without good credit, a person can't borrow money—or if she can, she'll pay more than someone with good credit. For example, a person with bad credit may not even be able to get a credit card.
Bad credit not only affects a person's ability to borrow and what it costs her to so do, but it also can boost the car insurance premiums she'll have to pay. Bad credit can even keep a person from getting the job she want because some employers do credit checks on people they're thinking of hiring.
Your child will get good credit by building up a credit history of paying bills on time from the time she's 18 and onward. That's the time when she's old enough to make legally enforceable contracts under the law, so that's also the time when credit companies start keeping track of things. If she has never paid a telephone company bill or had a credit card, she probably doesn't have any credit history.
After she's 18, she'll start to be flooded with offers from credit card companies. Some kids think that because the credit card companies make the cards available, they can use them without regard to their ability to repay. They keeping using the cards until the credit card companies turn off the flow of money. As a result, they're in debt over their heads and have ruined their credit history.
Bad News of Borrowing
The concept that borrowing costs money isn't hard to grasp, but some people don't take this seriously and don't handle credit well. They borrow too much and can't repay in a timely fashion, which can get them into a lot of financial trouble:
Dunning is the practice of bill collectors trying to get money that is owed by writing or calling. It's hoped that by if the practice is annoying enough, the debtor will pay up.
Financial Building Blocks
The current law makes it rather easy to gain bankruptcy protection. However, Congress is seriously looking at ways to make it more difficult to ring up large debts and then seek shelter under the umbrella of bankruptcy protection.
- They wind up paying a lot of their income each month toward interest. At this point, they're unable to use their money on other things because they're using their money just to pay back what they owe. They can't save, and they can't get ahead.
- They may not be able to pay what's required. As a result, they might go into default on their obligation. At this point, they can lose the collateral for the loan (for example, a car can be repossessed on an unpaid car loan). They can be dunned for payment with phone calls and letter demanding immediate payment or else. Make sure that your child knows he has rights, though, even if things come to this. Under the Fair Credit Collection law, a person usually can be called only during business hours and can't be harassed.
- They may be sued by the credit card company or other lenders. Make sure that your child understands that she shouldn't ignore any official papers that may come her way to inform her of this legal step in the collection process. If she doesn't respond when she's supposed to, she loses her right to contest the claim later.
- They may be forced into bankruptcy. Bankruptcy is a court-supervised process of settling up debts with existing assets, maybe only for pennies on the dollar, and wiping a person's financial slate clean. Most debts are extinguished in bankruptcy so that the debtor can start anew. But bankruptcy stays on a person's credit history for 10 years, negatively affecting his ability to buy on credit during that time.
As a practical matter, if the debt is $50, no creditor is going to spend the time and effort to go this extra mile for collection. But if the debt runs in the thousands and many creditors are owed money, there may be no choice but to seek protection in bankruptcy—or be forced into it by creditors.
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Excerpted from The Complete Idiot's Guide to Money-Smart Kids © 1999 by Barbara Weltman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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