5 Lessons to Teach Kids About Credit

5 Lessons to Teach Kids About Credit

What have you taught your children about credit? Even if you think you have never given them a lesson, you probably have. The way you spend your money, talk about money and live your life in general are absorbed by your little ones. Has your child ever asked you for something and you had to tell them you could not currently afford it. They might even suggest using a credit card as they have likely seen them used to buy things. Your child may be under the impression that a credit card is like free money if you haven’t explained how they work.

This early exposure carries on into their adolescence. So even if you have never sat down with them and specifically addressed credit cards they have probably already picked up on some of your spending habits. So, before they are on their own and given carte blanche, it is important that you make sure they are equipped with some basic knowledge as opposed to letting the myths of childhood linger. Instead of letting them pick and choose what they think they know about credit give them some basic information today that can help them shape their future tomorrow.

What is credit:

This is a lesson that can be taught early on, but is important at any age. While kids are still young it is important for them to know that credit is not free money. Explain to your children that that money has to be paid back. Also let them know that the longer the money takes to pay back the more the it costs. They should also know the difference between debit and credit cards.

Responsible use of a credit card may go against what your child has previously believed. Many kids think that credit cards are for when you don’t have money. When in fact it is the exact opposite. Let them know if you didn’t have money you would not be able to pay it. Let them know that paying on time is one of the most important parts that help determine your credit score.

The importance of a credit score:

Let them know they will be graded and they will receive a score based on responsible use and repayment of their credit card. Teach them that the score can range from 300-850. Even young children will understand the difference between a couple of hundred points and that, with the exception of golf, having a higher score is better.

Not having a credit score can be worse than a credit history with some mishaps. If you think it is better to not use credit cards and just pay with cash or a debit card you may not have considered the ramifications of not having a credit score.

Credit scores can be used for more than just obtaining credit. They can affect employment, insurance rates and the ability to lease an apartment. Although a mortgage may be beyond their needs right now they should know that an excellent credit score can save tens of thousands on interest rates over the life of a loan. You can even use a mortgage calculator to give them a visual example of how a couple of tenths difference in an interest rate can cost a chunk of money.

If you have good credit you may want to consider adding your child as an authorized user on one of your accounts to aid them in establishing a credit score.

Credit score kids
Discuss the basics of credit and credit scores with your children

Why they shouldn’t overspend:

As your child matures it is important you talk to your children about things like debt and how to avoid it. They should know about budgeting and how you need to pay for and acquire things over time. Explain how you spend your money and where it goes. Make sure that they know that many of the things they take for granted like food, shelter and clothing all need to be paid for with a certain amount of money before things like entertainment and material possessions can be considered.

If your teen is an authorized user on one of your cards stay strict and make sure they adhere to the rules and limits you have provided. Being lenient can cause them to establish bad spending habits. Keep in mind banks and credit bureaus will not forgive mistakes as easily as you might.

Make sure you have set parameters for use of the card like what they can spend on and what their limits are. Be sure to monitor your statement to be sure they are sticking to the rules. If you let them repeatedly overcharge they will be likely to overspend in the future. So be stern and stick to the limits it’s for their own good.

Discuss credit limits with your children. This may seem like laymen information as you may think everyone knows credit cards have limits. However, when youngsters are new to credit they may think that they can spend up to the limit. Therefore, if they have a card that has a $1,000 limit they can spend $1,000. What they may not realize is anytime you are carrying a balance that is more than 30% of your limit it can negatively affect your credit score. So, on a card with a $1,000 limit anytime you carry a balance of more than $300, it could cost a little more than just interest but possibly some points off your score as well. This is known as credit utilization and the higher you get to the limit the more negatively it can affect your score.

kids overspend
Teach your kids not to overspend

Monitor credit regularly:

Now that they have been taught what credit is and how to use it they should be taught how to check on it. It is important that once they establish their credit that they take steps to maintain it.

Monitoring your credit is so easy nowadays there is no reason not to do it. There are several apps available that can give you a weekly updated score on demand. They should check it regularly to be sure there are no mistakes and that all looks good and hopefully it is going up!

Protect private information:

It is also important to teach your children how to protect their private information. From internet phishing scams to card skimmers there is no shortage of those trying to get their hands on coveted personal information. To avoid electronic pick pocketing get your teen a wallet with RFID blocking technology

It is imperative they realize the importance of a credit card or social security number and the havoc it can wreak if it falls into the wrong hands. Make sure your teen knows never to give out their credit card information to friends or to loan anyone their card. It is important that they realize the extent of damage this can cause.

If they use the card often on the internet they may want to attach the card to a secured payment method that is widely accepted like Pay Pal. Make sure they know to never give out any personal information to someone over the phone. And always properly dispose of important documents such as credit card and bank statements or anything else that has important identifying information by shredding.