How to Teach Youth About Credit Scores

Credit scores serve as an instant measure for merchants of an individuals creditworthiness. Instant credit decisions based on the score number often determine not only if an individual receives credit but the expense of that credit as well. As a youth becomes old enough to use his own credit, its important to understand how that credit use affects him and his credit scores. Teaching them while young about the credit scoring system will save youths both money and frustration in the future use of their credit. In order to get the lesson across though, youll need to start with basic lessons about credit itself.

Instructions

1

Explain the details of how credit works. Cover the fact that credit extended in all forms is a loan being offered, and as a loan theres interest and penalties involved with nonpayment. Go over a sample credit report with the young people youre teaching. Show how each credit account is represented on the report, along with payment history.

2

Show your students a credit score chart with the number range and the credit ratings from excellent to poor grouped by number. Explain how the lower the score the greater the interest rate attached to any loan offered to the score holder. Perform a few sample math problems showing the effect of various interest rates on a price. For example, add 3 percent to $1,000 to represent a good interest rate and a cost of $1,003 if paid off in a year, and then add 23 percent to $1,000 to represent the bad interest rates offered those with a low credit score--ith a final product cost of $1,023.

3

Go over the effects of credit payment and nonpayment with the students. Point out that each payment made on time and according to the creditors agreements works towards raising their credit score, while each late or nonpayment will lower the score. Explain that a low score could prevent them from attaining credit for a large purchase entirely, keeping them from purchasing a car for instance, or gaining a home loan.

4

Explain the credit effects of actions not directly related towards payment that can affect the score. For example, explain that full use of the credit available shows that a borrower may be near her ability to pay her bills, so maxing out her credit is considered a negative, thereby lowering her score. You should also explain that constantly seeking new credit implies the same and lowers her score as well. Explain a few of the positive actions credit holders can take to raise their score, such as paying above the minimum payment amount, having a mixture of credit types and staying below their limit.