Credit scores, credit histories and credit ratings may seem alien to my daughter, but her credit score will matter. She won’t be able to navigate independent life very well without having one. Yet it is often easy to presume that a young person with additional needs won’t actually require one.
I got thinking about this after the podcast House for Rent, No Experience Required. Experience may not be required for my daughter to enter her first house, but a credit identity might. Julia explained quite clearly that landlords usually run a credit check as a matter of routine, and they don’t always understand the reasons why our children might fail a credit check. Instead they use the result as a basis to decide whether the applicant is a good risk.
In the consumer arena, stores run a credit reference before they issue their plastic. Phone companies check our credit rating before they let us walk out the shop with the latest phone and our new contract. After all a phone contract is a debt contract, even if it isn’t packaged that way. Default on your phone payments; look at how your credit score drops.
On a larger scale, the largest of all debts we take on, a mortgage simply wouldn’t happen without credit agencies keeping information and details of about our creditworthiness. Why would anyone lend me such a large amount of money without an idea about whether I would pay it back or not? Banks are no different. Ok they can take the property back but they aren’t real estate agents. They don’t want to repossess. Selling property isn’t their core business.
So whether we like it or not, to function in society we need to take care of our credit rating. I personally found this out when we returned after living in Australia. We couldn’t get a credit card for love nor money. As far as the credit system went, I was a persona non-grata. It took us a year to get a credit card, and that only happened because we then got a large debt in the shape of a mortgage. Then for some reason we were suddenly a good risk for a small limit on a credit card.
I foresee this same problem for my children. Without a credit history they will simply be noise. Not in the system. Non-existent. Noise equals bad risk.
Worse, it’s easy for me to be complicit with this system if I don’t think about my youngest. It’s so easy to presume that because our children have additional needs they won’t need a credit history because they are already vulnerable financially.
Sometimes when we think the ways we will protect them against someone running off with whatever we leave them, we forget about their life. Independence isn’t living in a plastic bubble with everything allocated to you. Independent living, if we truly aspire to that, is also about managing your finances. Daily bills. Rent. Upgrading phones.
I’m not suggesting for one moment that anyone signs their child up for things if they don’t feel their child has the financial maturity to manage them. I’m simply saying we must plan to give our children some financial independence. To me that means a credit history.
We need to turn our children into a good credit risks. So how do we do this?
That is the multimillion dollar question. Without credit you can’t build your credit score. So which came first, the chicken or the egg?
1. Get a current account from a bank
Perhaps this is the first place to start. Opening a current account with a chip and pin is something we should show our children anyway. We should show them how to manage their money, check their balance on-line and get cash out. We always encourage our daughter to use her contactless card to pay for things at shops. This helps to build her independence skills.
Without a credit history a bank won’t offer an overdraft facility straight away. They need evidence through use that the account is being run properly. But with time, and as other factors that increase credit scores begin to happen, there will be a day when they will be able to apply for an overdraft limit. Then do it. This will have the rolling effect of making your child just that little bit more credit worthy. At this point remind your child that an overdraft is not a lifestyle choice; it’s an added bit of security just in case a payment is taken twice from their account by mistake. I will emphasise to my daughters that the golden rule is to never borrow money, because you have to pay it back. Wait and save.
2. The Electoral Roll
When your child is old enough, regardless of whether you feel they have the maturity or inclination to vote, they should register to vote. I believe voting is our democratic right. Our children, even if we disagree with their views, should also be able to vote. That’s democracy. But being on the electoral roll marks on your credit file that you have a permanent, fixed address. If a creditor needs to find you to get their money back, they know where to find you.
Being on the electoral roll is one of the easiest ways to start or improve their credit rating. It requires no effort other than filling in a form. While voting is a right and responsibility, in most cases, except in countries like Australia where voting is compulsory, your child doesn’t have to vote if they don’t want to. Yet by being on the electoral roll, even without any intention to vote, your child’s credit rating will build and improve.
3. Direct Debits
Direct debits are next up on the list. The most obvious thing to aim for is a phone contract. Phone companies collect their payments through direct debits, and this will contribute to building a better credit rating. Perhaps in the beginning you might need to act as a guarantor.
Mobile phone contracts are a form of debt, and paying back debt makes credit worthiness. Back to the chicken and egg things. Unfortunately, to get a good credit rating, you need to get yourself debt and pay it back. But you can’t get credit unless you first have a credit rating.
I wouldn’t want to suggest a car loan or any other forms of debts, because debts means interest, and interest means lost money. I fundamentally believe in only one kind of debt, and that is mortgage debt because a property is too expensive to buy out of savings and we all need a place to live. But having said that I do have a phone contract.
But I think the key point is that we need to think about our children’s credit rating. Let’s not think that because they have additional needs a credit score is not necessary for them. To build their credit rating is no easier or no harder than it is for any other young person, and it will be a key part of their independence. If they are to rent a place in the private sector, they may well need a good credit rating. If we want our children to have some financial independence, then planning so they have access to credit plans for phones or, possibly, a mortgage is part of that.
I have started to build my daughter’s credit rating by helping her open her own bank account. Obviously the plan is to keep building on this – maybe I can pass on one of those direct debits I don’t like to her, like the electricity! But seriously I want her to participate in society, not be a passenger.