The American Bankruptcy Institute shows that 1 in 5 bankruptcy filings is made by a college student. If you don’t want your kids to become part of that statistic, set them up for success by teaching valuable financial lessons early in life.
You can – and should – teach your children about credit without having to give them a credit card. Once your kids turn 18, you can’t stop them from applying for credit. So it pays to educate them before they get their own plastic.
The Allowance: A Useful Learning Tool
Explain to your kids the value of saving their allowance versus spending it. If your child wants to buy something and doesn’t have all the money for it, use the opportunity to teach the concept of borrowing. For example, your child receives a $15/week allowance and wants to purchase something that costs $40. You could offer to buy it for the child in exchange for 3 weeks of allowances. When your child protests about the extra $5, explain that borrowing money costs money.
Talk about Interest
Teach your teenagers about the power of compounding interest. Tell them how compounding interest can hurt them when they borrow money, causing them to repay more than what was borrowed. If you’re not so sure of the concept yourself, use the internet to find some explanations on interest rates and finance charges. Here’s a great one from Common Craft:
Cash Before Credit
Let your child get a good grasp of handling physical money before you add plastic into the scenario. From young ages, kids are enamored with debit cards and credit cards because it seems like you’re spending magic money.
Let your child sit down with you while you balance your checkbook and explain where the “magic” money actually comes from. When you pay your credit card bills, give your child a lesson on credit. Show that even though you didn’t have to pay when you swiped your credit card, you have to pay later or the credit card issuer will punish you with late charges and higher interest rates.
The Credit Police
Tell your kids about credit bureaus and credit reports. Late payments go on their record and can prevent them from getting credit cards in the future. Not only that, a tarnished credit history can keep your child from getting a job, a car, an apartment, and a house. Late payments remain on a credit report for seven years. If your child’s debt becomes so overwhelming that they must file bankruptcy, that can stay on their credit report for up to 10 years.
Be careful about bailing your kids out when they have financial trouble, like a maxed out credit card or an overdrawn checking account. You may be sending the message that they don’t have to pay for their mistakes. If your child has to work off debt on their own, they’re less likely to repeat the mistake.
How do you teach your kids about credit?