Parenting is full of dilemmas and difficult decisions: when to let your child go to a friend’s house alone, how to teach good manners, when to let go and when to hold on. But one parental task that many people may not think about is teaching kids about credit.
Raising kids who are financially literate means teaching them about how to responsibly handle credit—not just credit cards, but other types of credit including mortgages, small business loans, car loans, and student loans. Learning what goes into a credit score, and why it’s important, is another component of being credit-savvy.
Here are five ways to teach your kids about credit and help ensure your kids will be smart about money when they leave the nest.
1 – Model good financial habits. You don’t need to tell your kids how much money you put into savings each month, but it’s a good idea to show them that you do put money aside for savings. Likewise, there’s no need to worry kids over what your family can or cannot afford, but it’s okay to tell them that some things aren’t in your family’s budget. Explain that you make a certain amount of money and have to decide the best way to spend it. Let them see you making a budget and sticking to it, even if they don’t know the nitty gritty details and amounts.
2 – Explain what a credit score is. It’s not hard to explain, really. A credit score is a way that someone can have an idea whether or not you can be counted on to pay back money that you owe. Kids understand about borrowing things and not giving them back. They know which kids are safe to lend their toys to and which are not. Use that idea to explain credit ratings. Help them understand at an early age that having a good credit score will benefit them throughout their lives.
3 – Tell kids what goes into a credit score. Making payments on time, keeping accounts open for a long time, using different types of credit, and not charging your card up to the limit are all concepts that most kids can understand. Explaining debt-to-credit ratio is a good math exercise, even for elementary-aged children. Make it into a game and show them a pie chart of what makes up a credit score.
4 – Give your children prepaid card when they are old enough. When your child is 13, he or she is old enough to have a prepaid card in his or her name. Even before this, you can give kids prepaid gift cards that they can use to practice paying with a card. Let them know how it feels to pay for purchases themselves by putting their allowances on a prepaid card.
5 – Keep an eye on your child’s spending, but let him make his own mistakes. With a prepaid account, you’ll be able to access the account information and see how much your child is spending, and where. But don’t swoop in to save the day every time your child gets into a tight spot. Dealing with missteps builds character.