Please note: This is an update to an article previously published by Equifax in September 2015.
You may be teaching your children about money and budgeting, but are you teaching them about the importance of saving money and handling credit?
It can be tempting to try to prevent your kids from making money mistakes by keeping them away from credit cards – or by not discussing credit at all. But you may be missing an important teaching opportunity.
You can actually begin talking about credit fundamentals when your kids are quite young. As they get older, your explanations can become more detailed as they are better able to grasp the nuances of credit reports, credit scores and identity theft.
April 12 is National Teach Children to Save Day. Teach Children to Save is a free national program geared toward children in kindergarten through 8th grade, sponsored by the American Bankers Association Foundation. It uses banker volunteers to help young people develop savings habits early in life.
Here’s a breakdown of credit and savings topics you might want to discuss with your kids and when it might be appropriate:
Early elementary school
— Stick with cash. Young kids can learn about money management by counting and using real money. Dollar bills and coins are usually easier for them to understand than credit.
— Introduce budgeting. As children earn an allowance or get gifts from relatives, they can learn how to make that money last. Help them sort their money into “spending” and “saving” groups, and encourage them to set spending limits to stay on track.
Middle to late elementary school
— Prepare for questions. If kids start asking about credit cards, that’s a cue that they’re interested and ready to learn more. For instance, your children may ask how money “gets onto” your credit card. Or, if you mention not buying something you can’t afford, they may ask why you can’t just use your credit card to buy it. These can be great teaching moments.
— Explain how credit works. Clarify that a credit card is a tool that allows you to borrow money instead of having to pay cash and there is no actual money “on” the credit card. But emphasize that you have to pay what you borrow back every month — and if you don’t repay it all at once, the company may charge fees, or a percentage of what you borrow in interest.
— Credit reports as report cards. You can explain that a credit history is a little like a report card. When you maintain a good credit history – i.e., good “grades” – you may pay lower interest rates on credit cards and loans. If they are interested, show them how you can check your credit reports. (You’re entitled to a free copy of your credit report every 12 months from each of the three nationwide credit bureaus – Equifax, Experian and TransUnion – by visiting annualcreditreport.com.) You can also talk to them about what a good credit history means and what makes a good credit history.
— If your child doesn’t already have a savings account, open one for them and encourage them to start saving.
— Show and tell. Show your children your credit card statements and 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.
— Hands-on credit lessons. If you give your child a regular allowance and they ask for it early because they spent their money, discuss budgeting and how credit works. Consider loaning them money and charging interest so they understand that borrowing money can come with a price.
— Consider a checking account to help teach budgeting and saving. You can help your teen open a checking account with you as a joint account holder, and possibly attach a debit card to the account. Be sure to explain the difference between debit and credit cards, as well as some of the risks associated with debit cards (they may lack the protection of credit cards should they be lost or stolen).
— Get real about identity theft. Make sure your teens know to be cautious about sharing their Social Security numbers, and let them know they may not have to provide it, even if asked (at a doctor’s office, for instance). Explain how identity thieves can use that information to apply for credit in their name – and that if identity thieves don’t make payments, it may impact your teens’ credit history.
— Create a digital budget. There are a number of digital budgeting programs accessible online or by smartphone. Teens can enter transactions and track expenses in multiple categories, and can also learn to set money aside to build savings.
Senior year of high school and college
— Introduce a credit card – with training wheels. If you haven’t yet done so, consider opening a credit card account during your teens’ final year in high school and making them authorized users. You can keep the credit limit low and monitor the account carefully, intervening if necessary. If your teens practice credit card use, including making the payments, they may be better prepared to face credit temptations.
— Cover good vs. bad debt. Late high school is a good time to talk about student loans and explain that some kinds of debt can be beneficial in building a credit history, as long as they borrow only what they can realistically afford and always make on-time payments.
It may seem like your children are too young to understand the ins and outs of savings and credit, but the sooner they start learning, the better. Teaching them about credit early may help them avoid some common credit mistakes that can occur in early adulthood, such as missing payments or overspending.