How to Teach Your Child About Credit
In Prepare Your Child to Leave the Nest , we talked about the need to teach your kids the mechanics and values related to money. As we noted, it is a process, not an event. Over the years, you will teach age appropriate concepts and skills, giving your kid lots of chance to practice, make mistakes and learn from them.
I’m trying to help my adult children teach their kids about personal finance. Each year, I hold a week long ‘Grandma Rie’s Money Camp‘ with them. We started at ages 7 and 4 last year. Right now, the concepts are simple and concrete – what does a quarter look like – how many nickels in a dime, how do people earn money and etc. As I look ahead to the future, I know that I need to find a way to teach them how to use credit wisely, including credit cards.
Things are changing rapidly in the technologies behind money transfer and the relationship to currency and coin is disappearing. How do you teach a kid that swiping an electronic wallet is creating a debt that you have to pay? How do you teach a kid that plugging in a credit card number to buy a toy on Amazon isn’t using free money?
I sucked at teaching my own kids about credit. Sure, we had cards – but we didn’t use them often. Little did I think that my kids would get bombarded with credit card offers and that one of them would use them with abandon! I mis-handled the situation on all fronts.
I’m just staring to explore how to do better on this with my grandchildren, but here are my thoughts on the subject. I’d love to hear suggestions from parents going through this now.
Teach with currency and cash first.
Pre-school through 12
I think kids need experience with real money, currency and cash, before trying to teach them the need-to-knows about credit. They need to understand saving, earning, interest, spending, tracking and etc. Teach them to save money ahead of time to pay for wanted items. They need to experience using currency and cash, earning interest and earning money.
Share your credit transactions with them.
Age levels: 6 – 12
Let them see you paying with a credit card. Explain to them what will happen after you swipe that card or enter that number online or give it on the phone. When the bill comes, show them the transaction they watched you do and let them see you paying the bill. Explain how credit works, what a credit score is and why it is important. Go over how they can mess it up. Show them your credit report and explain it to them – multiple times.
Demonstrate all the different ways you can pay with credit and how each one is really a loan that can cost you extra money if you don’t get it right. Show the what they need to do to use credit without paying fees, or use it with lower fees.
Be their lender.
Age levels: 8 – 12
When they want something they haven’t enough money to buy, tell them you will loan them the money and they will have to pay it back with some extra. Make the ‘some extra’ painful enough that they continue to prefer to save the money first. Extend credit multiple times as the occasion arises and make sure lessons are learned about tracking the loans, paying back on schedule and the cost of the loans.
Give them experience using a card.
Age levels: 13 – 16
A child in their early teen years has learned about money and credit from you since toddlerhood. Now they are ready to start getting experience using a card. Many recommend that their first experience be a pre-paid debit card.
Some institutions also allow a child this age to be added to the account of the parent’s prepaid card and issued a card in their own name. Others such as the Visa Buxx card provide online pre-paid cards in the teen’s name and give parent’s the ability to track expenditures online.
Help them build a credit rating of their own.
Age levels: 13 – 18
Although a parent can add a minor child as an authorized user (at some credit card institutions), the child is not learning how to handle credit if the parent just pays the bills, and in order to keep their own credit rating intact, the parent will want to pay the bills.
Putting a child on your account as an authorized user does, according to USA Today, help your child to build their own credit rating, but you will want to make it crystal clear to your child how they can and cannot use that card!
I never added my children to my cards, but I think if I were to do this today, the kid would get a copy of the bill with all of their transactions highlighted and a total due to me bill sent along with the copy.
Use their first real card as a teaching tool.
Age levels: 18 and up
After they are old enough to get a card in their own name, help them explore the best options for getting a card with the best terms and rates. Since they won’t have too much credit history, the rates and fees may be higher for them.
Research the best card options together. Go online to find information about consumer laws governing credit cards. Compare various cards and offerings of cards to see which is best. Check in with the bank where your teen has an account to see what kind of offers they have, them pick one.
Help them apply for a card. Help them obtain the application, force them to read and understand the fine print. Explain to them, multiple times, the impact of not paying the balance off each month. Tell them more stories about people struggling with credit card debt. Tell them your stories if you had that experience.
Monitor their card usage. Have them share their transaction reports (whether online or a paper statement). Go over them together and answer or help research any questions they have. Continue to have your teen bear the consequences of their actions. If they charge so much that they can’t pay it off right away, help them develop a plan to get it done – don’t bail them out or let them raid savings that is put away for something else!
Don’t lecture them on what they are buying, but do discuss pros and cons of putting different types of purchases on credit as opposed to paying for them out of pocket with cash.
I was unpleasantly surprised to find that one of my son’s had run up over three grand in credit card charges in college. We had always been responsible credit users and I just assumed that my kids were soaking that up through the environment. Well he didn’t. Instead of developing a plan with him, I let him use an inheritance from his Grandmother to pay off the balance. He went on to have even more credit struggles for the next few years. He thought there would be easy money to pay off balances all the time!
So, what do you think? Will my plan work to help my grandchildren learn about credit and credit cards?