Introducing Financial Concepts to Your Kids: Teaching Credit

A recent study found that nearly 20 percent of young adults (ages 18 to 24) in the United States with a credit record have debts. Many are students or early employees with limited resources to meet financial commitments and minimize economic shocks.

While this data shows a glimpse into young adults' financial well-being, it doesn't include young adults without credit records. Just because many young adults struggle to manage debts doesn't mean your kids will be in the same situation in adolescence.

Teaching credit is one way to prevent your kids from having debts in collection. Why should you do it, and how can you help them understand this concept easily?

The Importance of Teaching Credit to Your Kids

Although teaching kids about money requires effort and patience, it is essential to ensure their financial literacy. The earlier you start, the better. 

Here's how teaching credit to your kids significantly impacts their financial knowledge and understanding:

To establish a strong foundation of financial literacy

Teaching credit involves helping your kids understand the concept of borrowing, budgeting, and credit scores. When your children grasp these principles, you are arming them with the essential skills and information to make well-informed financial choices. This empowers them to establish a solid financial literacy foundation that they can carry into adulthood.

To foster good spending habits

Kids' behaviors and attitudes toward money are essential to hone during their formative years. The earlier they are taught good spending habits, the quicker they generally learn. Then, they can foster these habits as routine with constant practice.

Moreover, you enrich your kids' critical thinking skills. When they know how to think critically, they are encouraged to plan their expenses and establish a more careful approach to spending, preventing overspending and impulse buying. 

They'll also become cautious of accumulating debt, enriching your kids' mindful relationship with money.

To be a role model of responsible financial choices and decisions

Kids generally mimic the habits and behaviors of the adults surrounding them. As their parent or guardian, they acquire most traits from you. What they see is what they learn, and financial values and habits are no different.

Your financial values are reflected in your attitudes and behaviors, which your kids can adopt quickly. Since they view you as their role model, they might think your financial values are always good, even if they aren't sometimes. This is how teaching credit enables you to showcase responsible financial behaviors.

Not only does teaching credit help your children understand financial concepts, but it also fosters responsible financial management. You may realize you have had a negative financial behavior that your children could've seen. This becomes your opportunity to correct the mistakes and tell them they shouldn't follow certain behaviors.

To gradually help your kids kickstart their financial independence

Fostering financial independence prepares your kids for higher education. 

You can gradually encourage this aspect by teaching credit, allowing them to make financial decisions independently and safely while under your care. Consequently, they'll know how to navigate the financial aspects of high school and college when they become teens and young adults.

Saving for education purposes, paying bills, taking student loans, buying insurance, and managing their student checking account won't be daunting. This way, your children know how to make major financial decisions, fostering positive financial independence.

Tips for Teaching Your Kids About Credit

Your children's journey to financial literacy isn't linear. They may not immediately understand what you're talking about, so patience and effort are necessary. Teaching methods are also unique to your children's capacity, so here are the tips you can follow:

Explain the importance of building credit and using a credit card wisely

The first step to teaching credit is explaining credit cards and the importance of building credit. Discuss what credit cards are and how they work. Tell them credit cards let them borrow money they'll repay in full or installments with interest.

After discussing credit cards:

1. Talk about credit building

2. Explain its importance and how they can build theirs

3. Use your own credit-building experience

4. Elaborate how high and low credit scores have impacted your financial situation

5. Expound on why certain situations and consequences happen based on the credit score

Elaborate the essential factors that make up a credit score

Once your kids understand the initial credit talks, explain credit scores and the factors that determine these numbers further. Discuss how payment history, credit history length, owed money, and recently opened accounts affect a credit score.

Cover the basics, including credit bureaus and reports. Then, explain that getting a high credit score takes time. Visualizing the discussion by showing your latest credit report is helpful. This way, your kids will see actual documents to help them visually understand what you're talking about.

Include your kids as authorized users on your credit card

When you think your child is ready, add them to your credit card's authorized users. Being an authorized user provides an initial experience of using credit cards and credit building. If they make an unapproved purchase, use it as a learning moment.

You can also get them a prepaid card if you don't want them to use a credit card yet. Prepaid cards are reloadable cards that don't require repayments. However, they can teach your kids to spend within the card's limit.

Lend a small amount of money and require them to repay it

Since loans are part of credit building, lend your kid a small amount-$20 or $50. Require them to repay and create a payment plan they can follow. If they struggle to repay, encourage them to negotiate alternative ways.

This method aims to familiarize your kids with payment management and negotiations, fostering a proactive approach to initiating dialogues to resolve potential issues. Consequently, your kids will understand the importance of talking to creditors rather than ghosting them in adulthood.

Incentivize and reward your kids for responsible spending habits or credit use

Like credit unions' rewards programs, incentivize your kids for responsible spending habits or credit use. Acknowledging your children's positive credit management makes them feel good about money, fostering healthy financial behavior.

Incentives can be additional allowances or letting them choose how to redeem a credit card reward. They can motivate your children to maintain positive credit management and spending habits.

Set Your Children Up for Financial Security

As a parent or guardian, the responsibility of building your kids' financial security lies in your hands. By helping them understand credit as early as now, they can turn the learnings into habits they'll carry into adulthood. 

Consequently, you can rest assured about your children's future financial security, and they will also express gratitude for your guidance in instilling financial responsibility.