Teaching your kids about money when they're young can help them build good financial habits. Here's how to tackle the credit topic with your children.
Explain what credit is: You borrow money to pay for something with the intent of paying back that money within a certain time frame. How well you pay that money back can impact your credit score. If you miss payments, it lowers your score, may cause you to pay more, and may prevent you from borrowing what you need in the future.
Tell them that it can be smart to borrow as little as possible, but it's not always bad to have to borrow money for instance, for big purchases like a house or an education.
Look for teachable moments
Your kids may better grasp the concept through real-world application:
- While shopping, pay for one purchase with cash and the other with a card. Explain that the credit card is not free money, and you'll have to pay the bank back later.
- When your child asks for an advance on her allowance, explain that she'll have to pay it back by a certain date, just like you do with your credit card.
- If your children want an expensive new item that you can't afford, explain that a credit card doesn't exactly make it attainable. If you charge now but still can't pay the amount when the bill arrives, you'll end up paying more than the original cost.
Put discussion into action
Set your children up for success through the bank of Mom and/or Dad:
- Allow them to borrow a set amount of money from you (credit limit) and write down when they need to pay it back (due date).
If they don't pay on time, charge them a late fee and calculate interest on the amount owed. They may protest, but they'll learn the lesson from you instead of from a less-forgiving credit company down the road.