New research finds children who grow up surrounded by banks tend to have higher credit scores as adults – in part because they grow up more trusting of banks and financial services and, as a result, are more likely to use credit and pay their bills on time.
The next time you head to the bank, you may want to bring your children with you.
Exposing them to real-life financial institutions, such as a community bank or credit union, when they’re young could have a positive impact on their financial and credit health for years to come.
New research published in the Journal of Financial Economics found children who grow up surrounded by banks tend to have higher credit scores as adults – in part because they grow up more trusting of banks and financial services and, as a result, are more likely to use credit and pay their bills on time.
“Exposure and trust go together,” said study co-author James Brown in a news release. “If you grow up in an environment with more banks, you’re more inclined to trust banks and the financial system. If you grow up in a financial services desert, you’re much less likely to trust financial institutions, which may be one reason you don’t engage or you don’t pay back your credit card bills with the same frequency.”
Children isolated from banks tend to have worse credit as adults – or none at all
The researchers came to their conclusions after comparing the credit histories of people who grew up surrounded by financial institutions and those who grew up in much more isolated areas, with a dearth of financial resources in their communities.
They found people who grew up with less exposure to financial institutions had more late payments and lower credit scores on average. They were also much less likely to have a credit report in the first place – making it harder for them later on to access affordable credit.
People who grew up near financial institutions, on the other hand, tended to be more financially successful. They were not only more financially literate, researchers found, they were also more trusting of banks – and thus were more likely to engage with them. As a result, they established credit histories at a younger age and had an easier time qualifying for loans. They also missed fewer payments and tended to have higher credit scores.
“Beyond the key role early-life experiences play in the formation of financial attitudes and beliefs, our work shows that the financial markets individuals encounter at a young age have a large, persistent impact on how they build and manage credit over their lifetime,” wrote researchers in an earlier version of the report.
See related: Credit scores and your kids: How to explain to them what they are, how they work
Never visiting your bank branch with your child may have a negative effect
Although the paper focuses primarily on what happens when children grow up in a certain kind of environment, it has intriguing implications for children from all walks of life – including those who live in less isolated areas.
For example, as more people do their banking online, children may have fewer opportunities to be directly exposed to financial activity. Children who live near a bank, but never go inside or watch adults engage in everyday financial routines, may also miss out on an important learning experience.
“Our work not only speaks to the long-term benefits of financial inclusion but also suggests that traditional banking institutions matter through an underappreciated channel – early life engagement with financial markets,” wrote researchers in an early version of the report. “This insight is important to consider as traditional local financial institutions continue to consolidate and move services online.”
See related: How to help kids build credit before age 18
What you can do to foster financial trust and literacy in your children
Something as simple as taking your children with you when you visit your local bank or credit union could have a surprisingly big effect, research suggests. It may not only make banking seem less intimidating; it may also make your children more trusting and confident in their ability to positively use financial products themselves.
That, in turn, could benefit their financial health and credit scores for years to come. For example, if your children start to responsibly use credit at a younger age, their credit scores will almost certainly benefit – especially if they pay all their bills on time and keep their balances as low as possible. Length of credit history is an important factor in credit scoring, so the earlier children start responsibly using credit, the better it may be for their scores.
As adults, they may not only qualify for cheaper loans and more appealing financial products. They may also have an easier time becoming financially independent at a younger age since they’ll be able to rent an apartment or buy big-ticket items, such as a new car, without a co-signer.
Growing up more financially confident may also help improve children’s financial literacy and help them make savvier decisions as adults. Previous research has found young adults who are financially self-confident tend to be financially better off.
People are also less likely to overspend or make short-term financial missteps when they believe they have the ability to influence their financial destiny, research has shown.
So if children grow up more confident in their ability to successfully navigate the financial system and benefit from strong credit scores, they may also have a much stronger incentive to cultivate and maintain a healthy credit history.