Talking to your children about financial management is crucial if you want to help prepare them for managing their own finances later in life. Most people wish they had a better financial education early on. But even those with a good knowledge of financial management may struggle to teach this to younger generations without a sound plan. This knowledge can set them up for lifelong financial security. Here is our quick guide for how to teach kids about credit at any age.
How to Teach Kids About Credit
To teach kids about credit, ideally you should start the conversation about money and finances early on to help them build better money habits right from the beginning, because establishing good credit takes time. Finance is becoming more talked about in many households and there are plenty of age-appropriate money topics to teach kids about credit at every stage. If you have teenagers it’s never too late to start teaching them about credit, especially since those credit card offers could be landing on the doorstep as soon as they turn eighteen which is a dangerous trap that is hard to get out of without a good knowledge of how credit works. “You often see college kids who never had experience using a credit card or talking about credit at home with their parents getting into financial trouble and racking up high balances,” says money-saving expert Andrea Woroch. If you take the time to teach kids about credit by talking about types of credit cards and how to use them correctly will help them build good credit and spend responsibly right from the start. These good habits can help pave the way for major purchases and key milestones. Especially since credit impacts future life choices, like the opportunity to buy a car and the impact employment opportunities.
Children’s first encounter with money could be playing shops, pocket money or begging you to make purchases on their behalf so starting to teach kids about credit will actually help you out in all these scenarios. But first of all they need to learn about value. Ask them to set the prices in their imaginary shop by thinking about the value of items. Keep it simple with whole numbers and talk through why different items have different values. Ask them to count out the quantities of money. Use a clear money jar so they can relate visually to the quantity that goes in. Moonjar uses compartments to start children thinking about saving, spending and sharing their money, by donating to a charity for example. This is a great way to teach value because they will get used to dividing up their money and thinking about where it will go. They will also learn by example. They will mimic your spending habits so teach kids about credit by talking to them about what you will be spending your money on while they are with you and stick to these boundaries. This is a valuable tactic when visiting the toy shop or department store! Try to avoid arguing about money in front of children. This can weaponise family finances and cause emotional spending which will hijack their ability to make strategic financial decisions. Studies suggest that children’s spending habits are formed by the time they are 7 years old. So teach kids about credit by asking your child to pay the cashier for you when you are shopping with them. This will get them used to the real values of everyday items.
What is Credit Anyway
It’s important to teach kids about credit by explaining that a credit card itself isn’t just a piece of plastic that can buy them things they want. A good point to start with is that credit that goes unpaid will end up costing you a lot more than the original price of the item. To teach kids about credit, keep it simple with a straightforward explanation like this: Credit is used to buy things that you don’t have the full amount of money for right now and enables you to pay off the total in smaller, regular quantities, but a little bit of money is added every time, to pay the lender for their services. Explain to them that they will not be given a big amount of credit if they have no credit history, or worse a poor credit history. This is because the lender needs to trust them, so they need to use their first credit card little and often to prove to the lenders that they can be trusted to use their money sensibly and pay the creditor back in full and in good time. When you think they are ready, try lending your child an amount of money to buy something that they really want. The quantity will depend on your family’s spending habits, but make it large enough for them to need to set up a repayment schedule with you that they can stick to. Work this out together to make sure it is a commitment they can achieve. You want to build their confidence, not lose their trust. If they have trouble with the repayments, encourage them to talk to you about ways they can make it up, such as paying double the next time. If they do well, discuss lending them a larger amount in future. This is a really practical way to teach kids about credit.
Show Them The Money
Explain that there are consequences for not making payments on time or in full. “Lenders stand to make big money from fees and interest, which can lead to bills much higher than the cost of the initial purchase,” says Monica Eaton, certified financial education instructor and author of children’s book Money Plan. “That’s why it is important that kids understand that the decision to use credit can have long-term financial consequences.” Money Plan, which is suitable to teach kids about credit aged 4 and up, offers a clever approach to teaching young readers about money, saving, budgeting, and working hard. Told in rhyming verse, the story follows Mia and her mommy on their Saturday morning trip to the grocery store. When Mia spots her favorite treat, she gets her first introduction to money management. Talk to your child about the importance of spending within their means, and making payments as soon as possible so they don’t get bogged down with fees and high interest rates. Show them a credit card bill if you are able to and get them to help you add up the incoming and outgoing amounts. Highlight the interest to help them understand how credit works the consequences of missing payments. This should be a big eye opener when you teach your kids about credit.
Explain to your kids what a credit score is. This is how they will be rated by the lenders. People who achieve a good credit score and can maintain that will be offered more credit than people with a low score or no score at all. This is because the lenders can trust someone with a good score, because they have proven that they can make the payments back by doing so before. They can sign up to a service like Clearscore to find this out and track the progress of their credit score. A credit score is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner. This is a valuable early lesson when you teach your kids about credit. There are lots of apps to help track spending and tracking your credit score can help them set goals and understand how to use credit effectively to improve and maintain a good score. Remember to highlight that lenders like to see borrowers using less than half of their available credit ideally. Regular use little and often and making payments on time and in full, all boost a good credit score. So there really is every reason to teach kids about credit early and get them building a good score for when they may come to need a larger amount of credit for an important purchase.
Practice Makes Perfect
From the age of 18 your child can be added as a cardholder on one of your credit card accounts. This will help them build good credit through your existing credit history, while also getting a feel for using a credit card for occasional purchases or emergencies. If your child does make a mistake with purchasing something that you didn’t approve of, use it as a teaching moment because they will get the hang of it eventually. If you prefer you could give your child a prepaid debit card like Go Henry, available for children aged 6 and over. This is a good way for them to practice spending and working towards savings goals. This will get them used to having their own card and the app can be used to make instant transfers, track usage, and will help your kids budget and spend within their means since it’s a debit card. You want them to develop confidence talking to their creditor. Even for adults a proactive approach and open dialog can resolve any issues repaying debts. Creditors would always rather you talk to them than ghost them when there are problems, which can escalate quickly if they go unacknowledged and unresolved. Just like credit card companies, offer rewards for positive credit card management such as points and low interest rates, to teach kids about credit reward your child when they show responsible card usage. “Acknowledging your child’s positive credit management will make them feel good about money and influence healthy financial behavior in the future,” says Woroch. This can be a bonus in their allowance, or if they earned rewards through a credit card they’re using, let them choose how to redeem it. Autonomous spending encourages independent financial stability.
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