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How to Teach Your Teens About Credit – Forbes Advisor

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Your teens probably think that they know everything and also likely tell you so daily.  However, it’s a safe bet your kids haven’t learned all they need to know about a vitally important topic: credit.  Here’s what you need to make sure your teenagers understand about credit.

They’re Probably Not Learning About Credit at School…or Home

A recent NextGen study found that only 1 in 6 high school students are required to take any classes on personal finance in the U.S. Combine that with the two thirds of parents uncomfortable with “the money talk” that T. Rowe Price found in their survey and you’ve got a dangerous recipe for credit ignorance.

Why is it so hard to talk about money with our kids? It may be partly because parents aren’t confident in their own financial situation.  When 4 in 10 adults can’t find the resources to pay a $400 bill it’s understandable that it can be hard to teach lessons that haven’t been learnt. If you don’t want your children to repeat some of the same mistakes you did, the single best thing you can do is buck up and have an honest conversation about credit and money.

There might be a silver lining in the financial mistakes you’ve made: You may have a prime example of “what not to do” when it comes to credit. If you went nuts with your first credit card and spent years paying it back, your negative experience can become a lesson for your kids.

Credit Lessons Teens May Need to Unlearn

Once you dig in, you may find that even teens who learned about credit in school may have info that is either incomplete or just plain wrong. While teaching kids not to spend more than they earn is a good thing, some financial literacy programs go too far in the other direction with scare tactics about irresponsible debt.

For instance, my high schooler learned that having more than one or two lines of credit was dangerous, which is patently untrue. Carrying balances on high interest credit cards is dangerous, but having a couple of credit cards you pay monthly plus a low interest loan on a car that gets you to work or class can be a responsible choice.

How to Get a Winning Credit Score

Teens are used to playing games and a handy way to teach them to win at the game of life is to help them understand what a good credit score actually is. Even more important than understanding what is a good number is learning how that number is calculated. In general, here are the five categories that add up to winning credit:

  • Payment History 35% Win by paying your bills on time
  • Amounts Owed 30%: Win by borrowing a low amount compared to your total lines of credit, also known as credit utilization
  • Length of Credit History 15%: Win by keeping at least some accounts open for a long time
  • New Credit 10%: Win by not applying for too much new credit too often
  • Credit Mix 10%: Win by having a balance between home loans, car loans, credit cards and other types of debt

If your teen does better with concrete examples than percentages, you can use a calculator to show your teen the exact penalty charged for bad credit.  For instance, the interest on a car loan for someone with excellent credit averages 3.23% according to Experian. For bad credit, the same car loan could cost up to 11.35%.

For a $20,000, five year car loan, that’s the difference between paying $370.46 monthly ($23,227 over the course of five years) and paying $449.31 monthly ($27,958.37 over the course of five years). :

The difference of $79 per month for a car payment is easy for any teen to understand, especially when you can easily see how it adds up to over $4,700 in unnecessary charges if credit is properly kept in check. You can further help drive this home to your teen by having them relate the cost difference to how many hours of work they would need to do to cover the increased cost.

Jump Start Your Teen’s Credit Journey With Authorized User Cards

One way to give your kids credit with training wheels is to give them authorized user card from one of your existing credit card accounts. By doing so, your kids can get a jumpstart on building good credit by allowing them to inherit the history of your account. However, if you miss a payment or have high utilization on that account, your child will inherit that negative information as well, so make sure that you have a good hold on your credit before you try to help your kid out in this way.

If you actually give the card to your child for their use, keep in mind that you’re on the hook for every charge they make, so be sure you’re comfortable with your teen’s level of self-discipline. The last thing you need is hundreds of dollars in bills because your kid decided to buy pizza for the entire track team.

American Express allows authorized users from the age of 13. Perhaps the best part about American Express’ authorized user cards is the ability to set limits on each card, which puts a guardrail in place against your teen’s credit card mishaps.

Chase and Citi do not have an age requirement for authorized user cards, so either could be another viable choice for your tween or younger kids. However, banks besides American Express do not allow limits on authorized user cards, so tread carefully if you have a high credit limit. One workaround around this is to designate a card account that only your teen uses, then set a low limit on the entire card account.

Consider What Your Teen Might Need From a Credit Card

When thinking about which authorized user card to get for your teen, it’s a good idea to think about the kinds of situations that might require assistance a credit card can provide. For instance, roadside assistance came in handy when my son ran down our car battery charging his cell phone. His Chase Sapphire Reserve® authorized user card came to the rescue with its roadside assistance benefit and it was less than 40 minutes from the “click” of a dead battery to the “vroom” of a ready-to-go engine.

Another example: If a study abroad or foreign gap year is in your teen’s future (once we can all safely travel again), you’ll want to make sure your child is carrying a credit card without foreign transaction fees. Many no annual fee cards have pesky foreign transaction fees that can add up to 3% to the cost of every single purchase overseas.

Debit Cards Are Important, Too

You might also want to think about which debit cards are most suited for your teen. The SoFi debit card, for instance, rebates ATM fees worldwide. That could come in handy both if your teen goes away to college,  studies abroad or takes a gap year. A joint checking account with a debit card could be the most convenient way for you to help your teen manage their finances as you can deposit funds your kid can access right away.

However, you need to make sure that your teen understands that when the checking account is empty, the debit card stops working.  A debit card might look like a credit card, but it definitely does not function as one in a pinch.

A Secured Credit Card Might Make Sense

If you know your teen and want to let them test out credit on their own, there is a type of credit card an under-21 without income will be more likely to qualify for without your help: a secured credit card.  The Fair Credit Act of 2009 solved the problem of credit card abuse running rampant on college campuses by preventing those under 21 from applying for a credit card unless they had income or a co-signer.

A secured credit card could be a work-around as the card requires a cash deposit and only issues a credit line that matches the amount of the deposit. Proof of income may still be required but under 21s are more likely to be approved for a card that requires some skin in the game. Secured cards usually still report to credit bureaus and allow a path to building credit and eventually an unsecured credit card.

Credit Cards for College Students

If your student has income or you are willing to co-sign, another type of credit card to look into is the student credit card. Student credit cards usually come with looser credit requirements and have lower limits than standard credit cards so even a student with a part-time job can qualify. Once your student graduates from college, he may also graduate from a student card to a card with better terms. Before applying for a student credit card, be sure to make sure the bank you are considering accepts co-signers if you are choosing to go that route.

Bottom Line

You can’t rely on high school to teach your teen about credit. You have to step up and take charge so your kids are ready and able to responsibly use credit cards and other types of credit as they move into their adult lives.

Credit is a tool, like any other. Used to build a house, a hammer is effective and harmless. Used incorrectly, that same hammer can be deadly. Credit used responsibly can help build a successful future, or improperly used can destroy one.

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10 things you didn’t know will help you get a mortgage

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Anyone who wants to apply for a mortgage right now will know that it’s not easy. Coronavirus has made the process of applying longer, while lenders are now more careful than ever about who they will lend to. You probably already know that having a healthy credit score is essential to a successful mortgage application, but how can it be achieved? Personal finance experts from Ocean Finance  weigh in with the top tips for making sure your application is a success – that you may not have heard about. 

1. Make sure your name is on all household bills

If you share a rental, it can be tempting to let someone else put their name down on the utility bills and just pay them back. If you want a mortgage, avoid doing this: bills with your name and address on them are proof that you pay them on time. This especially applies to the rent itself – never move into a house share without your name being on the contract. Before applying for a mortgage, ask your landlord for a letter confirming that you pay on time. 

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How Can I Prequalify for a Personal Loan? A Guide

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When you are in need of money quickly, you very likely don’t want to sit around pondering a bunch of different options. You want to find the option that works best for you and utilise it. Unfortunately for so many people around the country, it can be difficult to get their hands on the money they need due to them having a bad credit score, or even no credit score at all.

How Can I Prequalify for a Personal Loan?

Photo, Varun Gaba.

Your credit score is thought of as being pretty important, as it shows your financial trustworthiness to financial institutions like banks, credit card companies, lenders, and more. Your credit score is one thing that will usually be considered by just about any company you apply for a loan through, so keeping a close eye on your credit score is imperative for your financial life.

No matter what your credit score looks like, knowing how you can prequalify for a personal loan can be a comforting feeling when you are in need of quick cash. After all, when you are eligible for personal loan prequalification, you feel a little better going into the loan process knowing you won’t have to wait around for a loan decision.

How is Pre-qualification Decided? Prequalifying for a personal loan can depend on several different factors that you will have to keep in mind, and it will vary greatly depending on the lender you are applying through. Here are two of the things you will need to keep in mind when it comes to your loan that could affect whether or not you prequalify for the loan.

— Your credit score; Yes, this is always going to be something you are going to need to think about. Depending on the financial institution or lender you are going through, you can bet that your credit history and score will play a huge part in whether or not you prequalify.

— The amount of your loan; How much money you plan on borrowing from the lender or bank is also going to play a part in deciding whether or not you prequalify.

To get the most out of your search for a lender that you could prequalify with, think about applying with more than just one lender. This way, you might get several pre-qualification offers, and this will allow you to sort through the lenders and decide which one works best for you.

How Can I Prequalify for a Personal Loan?

Photo, Christina @ wocintechchat.com.

The Pre-qualification Process: No matter where you are trying to prequalify for your loan through, you will find the process to be pretty simple and largely similar across most lending platforms. You will need to provide some information to the lender that will help them decide whether or not to prequalify you.

How Can I Prequalify for a Personal Loan?

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Some of the information you will need to provide includes:

— Your full name; You will want to make sure you provide your full legal name so you can make the process simple for yourself and the lender. Depending on the lender, you might also be asked to provide images of your government issued ID or driver’s license to validate your identity.

— Your income and information on your job; Your income and employment status are often considered over your credit score when it comes to pre-qualification for loans, especially if you are applying for a personal loan through a lender who deals with customers with bad credit or no credit.

— The loan amount you want; Of course, you will have to include the amount of money you would like to borrow. Make sure it is something reasonable, and something that you can realistically pay back on time.

What Will the Lender Do? If you are trying to prequalify through a lender who specialises in bad credit clients, then you won’t have to worry about your credit score being negatively affected by taking out your loan. However, if the lender reports to the credit bureaus, your payments could still make an impact on your credit score.

If not working with a specialised lender, you might find that the lender will do a soft inquiry on your credit when going through the pre-qualification process. No worries here, as this doesn’t put any dents in your score. If you prequalify for the loan you are looking for, you should get an alert via email from the lender of your choice.

The Money You Need: Hopefully, you will have prequalified for the loan you are looking for so you can ensure you have access to the money you need, when you need it. Whether you’re going through some unexpected circumstance in life or just need money to pay something off quickly, knowing you are prequalified for the loan you need is a comforting feeling, allowing you access to the cash you need for whatever you need it for.



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Are No Down Payment Auto Loans Bad?

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Qualifying for a zero-down car deal likely means having good credit and qualifying income. However, if you’re a bad credit borrower, you’d be hard-pressed to qualify for an auto loan without a down payment. Besides – down payments are typically a great idea for borrowers across all credit ranges!

Is Zero Down a Bad Idea?

Opting for a zero-down car loan isn’t a bad thing – but with a lower credit score, it’s not likely to happen. Most bad credit auto lenders require at least $1,000 down or that you bring at least 10% of the vehicle’s selling price to the table. Down payments are a requirement of most subprime (bad credit) lenders, and it’s often called having “skin in the game.”

Are No Down Payment Car Loans Bad?Research shows that borrowers with skin in the game are more likely to complete a car loan. To a lender, a borrower that brings a down payment to a deal is more likely to make their payments, complete the loan, and avoid default. It also means a higher likelihood of qualifying for the auto loan.

Down payments can widen your vehicle choices since they allow you to get into more expensive cars that are outside your preapproval amount. If you’re approved for a $15,000 auto loan, but can’t find anything for your situation, adding a larger down payment amount may open up more vehicle choices. In this scenario, if you have your heart set on an $18,000 vehicle, coming in with a $3,000 down payment could put it in your price range.

More Down Payment Benefits

Auto loans are typically simple interest loans, meaning you’re charged interest on the principal of your loan. If you combine a large loan amount, a high interest rate, and a long term, it can mean paying more than your vehicle is worth.

Remember this:

High loan amount + High interest rate + Long loan term = Paying more interest charges. A down payment can combat this, and help save you money.

For borrowers with poor credit, a high interest rate could mean paying more for your auto loan – but a down payment can soften the blow.

Down payments can help protect you from negative equity, too. Negative equity is when you owe more on the auto loan than what the car is valued at. Vehicles are depreciating assets, meaning they lose value over time, and that never stops.

Negative equity causes problems for borrowers when it’s time to sell the vehicle. If you owe thousands more on the loan than what you can sell the car for, you may not be able to sell the car. You must pay off the loan before you can transfer vehicle ownership.

If you finance a vehicle for $10,000, that car may not be worth $10,000 in a year. Most used vehicles lose around 10% to 15% of their value each year. Brand new vehicles can see around a 20% drop in value within the first 12 months of ownership! Having a down payment can help keep your auto loan in an equity position, which means you’re likely to have fewer issues selling the car if you need to.

How Much Should Save for a Down Payment?

Your down payment requirement largely depends on your credit score and the size of the loan you’re applying for. Like we mentioned, saving at least $1,000 is probably a good starting point if your credit score is less than perfect. But if the vehicle you want is expensive, it could mean having to shell out more cash than that to qualify for the loan.

How much you need to save can also depend on your monthly budget. If you want a specific vehicle but the monthly payments are too high, you can put more cash down to lower your payment and make the loan work for your situation. You can use our auto loan calculator to estimate how much you may need to put down to get your car payment where you want.

You also don’t need cold, hard cash to meet a down payment requirement. Trade-ins with equity can completely satisfy a down payment requirement if there’s enough value, or you can use a combination of cash and your trade-in. If you have a car you’d like to trade in, research its estimated value on sites such as NADAguides and Kelley Blue Book so you can see what a dealer may offer.

The bottom line with down payments is you should save as much as you comfortably can afford. Even if you qualify for a zero-down car loan, putting cash down on your next auto loan is only going to bring you benefits in the long run.

Where Can I Find Bad Credit Car Loans?

If your income or credit score isn’t quite up to snuff, then you can expect to need some cash down to qualify for vehicle financing. You may also need to work with the right auto lender to get the vehicle financing you need.

With a lower credit score, not only are you faced with a down payment requirement but also the struggle of having to find an auto lender that can work with poor credit. Most traditional auto lenders prefer borrowers with good credit. If your credit score is rough around the edges, then applying for vehicle financing through a special finance dealership could be the way to go.

Special finance dealerships are signed up with subprime lenders. These lenders specialize in assisting borrowers with credit challenges and look at more than your credit reports and score. They do require a down payment, but they can often work around tough credit circumstances.

At Auto Credit Express, we’ve amassed a nationwide network of special finance dealerships and we want to help you find one in your local area. To get matched to a dealer near you that has bad credit lending options, fill out our free auto loan request form.

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