Are you teaching your children about how to handle money but not about how to handle credit? It is certainly tempting to try to protect your kids from money mistakes by keeping them away from credit cards—or by not even talking about credit at all. However, by doing so, you might be missing an important teaching opportunity.
Believe it or not, you can start talking about credit fundamentals when your kids are quite young. Your explanations can then become more detailed as your kids get older and are better able to understand the nuances of credit reports, identity theft, and credit scores.
Here’s a breakdown of what topics you might want to discuss with your kids and when it might be appropriate to introduce them.
Early elementary school
• Stick with cash. Young kids need to learn about money management by counting and using real money. Dollars and coins are usually easier for them to understand than credit.
• Introduce budgeting. As children earn their allowance, they should also learn how to make that allowance last. Help them categorize their money into spending and saving money, and encourage them to set spending limits to keep them on track.
Middle to late elementary school
• Prep for their questions. When kids start asking about credit cards, that is your cue that they are interested and ready to learn more. For instance, your children may ask how the money “gets onto” your credit card. Or, if you mention not buying something because you can’t afford it, your children may quip, “Why don’t you just use your credit card to buy it?” These are great teaching moments.
• Explain how credit works. Clarify for your imaginative children that there is no actual money “on” your credit card. Explain that it is a tool that allows you to borrow money instead of having to carry cash. Emphasize that the money you are borrowing is not free because you have to pay it back every month. If you don’t repay all of it at once, the company will charge fees, or a percentage of what you borrowed in interest.
• Talk about being “graded.” Explain to your children that a credit history is a little like a report card. When you maintain a good credit history, you may pay lower interest rates. If they are interested, show your children how you can check your credit for free one time per year, per CRA, through AnnualCreditReport.com. You could also talk about what makes a good credit history, according to the CRAs.
• Show and tell. Occasionally show your children your credit card statements. Point out to them how long it will take to pay off your balance and how much extra you will pay in interest if you only make the minimum payment each month.
• Offer hands-on credit lessons. If your children ask for their next allowances early because they already spent all of their money, talk to them about budgeting and how credit works. Consider loaning your tweens the money and charging a hefty interest rate so they understand that there is always a price for borrowing.
• Check it out. Once your teens are working, consider helping them open a checking account (with you as a joint account holder) and possibly attaching a debit card to the account. This is the time to explain the difference between debit and credit cards because they probably seem identical to your kids.
• Get real about identity theft. Make sure your teens know to be cautious about sharing their Social Security numbers, and let them know they can refuse to share this information—even at the doctor’s office or school. Explain how scammers can use personal information to apply for credit in their name, and point out that when the identity thieves don’t make payments, it could impact your teens’ credit scores.
• Create a digital budget. Getting kids to budget can be difficult, so consider finding a digital budget that’s easily accessible online or on their phones. For example, I’ve introduced my teen to You Need a Budget (YNAB). With this program, she can enter transactions and track expenses in multiple categories on a computer or her smartphone. Good budgeting is the best defense against irresponsible credit use.
Senior year of high school and college
• Introduce a credit card with training wheels. If you haven’t already done so, you may want to consider opening a credit card account during your teens’ final year of high school and making them authorized users on the account. If you keep the credit limit low and monitor the account carefully, you can intervene or even close the account if your teens do not prove to be responsible. If your teens practice using a credit card, including making the payments, they may be better prepared to face the credit temptations in college and afterward.
• Cover good debt vs. bad debt. Now is the time to talk about student loans, another prevalent form of credit your children may encounter. This is a great opportunity to explain that there can be good kinds of debt, as long as your children only borrow what they can realistically afford and always make on-time payments.
It may seem like kids are too young to understand credit, but the sooner they get started learning, the better. By teaching them early to use credit responsibly, you may be able to help them avoid some common credit mistakes, such as missed payments or overspending, that can occur in early adulthood.
Teri Cettina is a personal finance and parenting writer/blogger. Prior to becoming a freelancer, she was an employee communications writer and editor for a large regional bank. Follow her on Twitter: @TeriCettina.