For young adults living at home who don’t yet feel the financial pressures of paying household bills, now can be the perfect time for parents to impart some credit-building lessons before they graduate and start living on their own. And the timing could be right since many Americans are at home in the COVID-19 pandemic.
A recent survey of Gen Z (ages 18-23) by NerdWallet found that many in this age group hold misconceptions about credit: 66% believe that building credit requires a person to carry a small balance on their card at all times (it doesn’t). As well, more than half in the survey falsely believe that having multiple cards is bad for a person’s credit, and 26% say young adults don’t need to worry about building credit. Parents can help dispel some of those myths.
Here are five ways to prepare your Gen Zer child’s credit for the real world while they are still at home:
1. Explain how building credit now can pay off later
Contrary to what many Gen Zers believe, building credit now does matter. Credit scores determine the interest rates they will pay on loans, including mortgages and auto loans. It can also determine whether a landlord decides to rent to them, not to mention cellphone plan rates and auto insurance rates — purchases that these young adults will soon face, if they haven’t already.
Silvia Manent, a certified financial planner and founder of Manent Capital in Boston, says another financial professional taught her early on that it was important to pay off her credit card balance in full each month, instead of just the minimum, to avoid interest. She also recommends that parents teach their kids how to find the current interest rate on their credit cards and how much they’re paying in annual fees, if anything.
Parents can also cover the basics of building credit: Paying bills on time, avoiding eating up too much of available credit limit (a good rule of thumb is to use less than 30%), and keeping older accounts open to increase the average account age.
“Having your kids at home is the perfect opportunity to educate them on how to use credit cards responsibly. Use dinner and family time to talk about credit cards, the economy, and using debt in a responsible way,” Manent says.
2. Show them how to budget to ease anxiety
NerdWallet’s survey found that 72% of Gen Zers say they regret their spending at least some of the time, and 41% say they feel anxious about their finances. One way to ease money stress is to use a budget to plan out spending. The 50/30/20 budget — where 50% of take-home pay goes to needs, 30% to wants and 20% to debt payments and savings — allows for flexibility for some splurges within the 30% category.
Mike Kurz, certified financial planner and CEO of OverShare Advice and Planning in Frisco, Texas, recommends setting up basic ideas about spending ratios based on income and talking over the difference between a long-term fixed expense, like rent, versus a one-time expense, like a piece of furniture.
“They typically don’t appreciate the issue of having a big portion of their income spoken for by fixed expenses,” he says, especially if parents have been covering those costs.
3. Help them tackle credit card debt quickly
Gen Z has already accrued significant credit card debt, carrying an average credit card balance of $2,230. Since credit card debt tends to carry a high interest rate, paying it off as quickly as possible can be a smart move.
4. Practice basic financial actions
A number of young adults haven’t yet written a check or applied for a credit card; basic familiarity with these sometimes necessary tasks can be helpful. The good news, according to NerdWallet’s survey, is that many Gen Zers are happy to do their banking completely online, which can be an easier (and safer) option in a global pandemic.
5. Share how you plan to help them — and not help them — after graduation
Kurz suggests creating a timeline so adult children know when they are expected to “fly solo” for the first time. He adds that the process can be gradual: He has a high school-age daughter whom he involves in decisions about what sports teams to join and the cost of the different options. He also has his middle school-age child pay for splurges like a videogame with his own money.
Sometimes, controlling what we can in what feels like an out-of-control time can help us regain a sense of normalcy, which is possibly what many Gen Zers — and their parents — are craving right now.
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Kimberly Palmer is a writer at NerdWallet. Email: email@example.com. Twitter: @kimberlypalmer.