Teaching Your Children How to Use Credit and Debt Responsibly
September 13, 2017
Teaching your kids how to handle money is one of the most important things you can do to prepare them for adult life and responsibilities.
As a parent or guardian, you have the heavy responsibility of preparing your child for the big world outside the home. You have to show them the things they should put in their mouth and the far larger number of things they shouldn’t. It’s up to you to teach them the danger that strangers can present. And you’ll be the one to teach them about finance, especially about credit and debt.
There’s a decent chance they won’t learn about these topics in school, and it’s knowledge they’ll need for their adult life. Without it, they might themselves buried with payday loans, trapped in a never-ending cycle of high-interest debt.
As Paul Vasey, founder of CashCrunch Games (@CashCrunchGames), told us: “Money habits are useful at any age and are basically the same whether you are 7, 17, or 70. Therefore, the earlier you learn something, the better you are at grasping your money and making smarter decisions.”
So how can you teach it to them? We’ve spoken to Vasey and other experts to learn exactly that. Read on, and educate yourself on how to best educate others.
(Oh, and by the way, if you’re looking for some financial education on the go, check out OppU—OppLoans’ free and easy online personal finance curriculum.)
Set your curriculum
Before you can start teaching your kids about finances, you have to know what you need to teach them. Other than “it’s good to have it,” what should you be teaching your kids about credit?
Katie Ross, Education and Development Manager for American Consumer Credit Counseling (@TalkCentsBlog), outlined some of the important lessons kids should learn about finance:
Identifying Needs vs Wants – It is important that children learn the difference between wants and needs. Children should be taught to think and identify if what they are looking to buy is a need or a want, and if the purchasing can be postponed for when the money is available. As part of this process, children can be encouraged to assess their financial goals to determine if they are realistic, achievable, and worthwhile.
Save and Plan – Children should learn how to keep track of their spending so they can plan their financial future. If your child has a job, explain the importance of putting a portion of the check into a savings account. Working age children should learn how to choose a bank and prepare for their financial future.
“The Value of the Dollar – It is important that children learn the core concepts about money and finances early on. Children should be introduced to the concept of money during preschool. Learning about money can be fun. Take advantage of casual trips to the grocery store as an opportunity to introduce new money concepts.
How to Budget – Budgeting is key. Children must know that they cannot buy everything when they want it. They must plan out how they can save the money to make the purchase without causing a financial disaster. Parents can introduce a budgeting worksheet that shows income and expenses so they can learn what money is being earned and spent.”
The basics of credit and debt
Natasha Rachel Smith, financial expert at TopCashBack (@TopCashBackUSA), told us what you should tell your kids about credit cards and debt:
“Teach your kids while they are young that credit cards aren’t just magical pieces of plastic that pay for things. Credit cards have due dates and, if you misunderstand the rules, you can be penalized by having to pay more money.
“My parents also stressed the importance of good debt versus bad debt. It is OK to accrue debt when it is good debt. Investing into a mortgage – provided the property was purchased at a reasonable, affordable price – is good debt. Where you can account for precisely and exactly where the money was spent is usually good debt. Frivolous spending is bad debt. Do not buy things you simply want, focus on the things you need alongside sometimes treating yourself to the items you want.”
Personal finance expert and motivational speaker Debbi King (@DebbiKing) offered her own take on what you should teach kids when it comes to debt and credit: “The first thing to let them know is that if they make positive financial decisions, their credit report will reflect that. Your credit score is your financial reputation. It shows others how you handle money.
“Then you need to make sure they know the difference between debt and credit. You can build credit without ever going into debt. For example, you can have a credit card and no debt as long as you pay it in full every month. Debt is owing more than you have. And credit is a form of payment. The best possible thing you can ever do for your finances is to build credit without debt. I know people who take out auto loans even though they have the money in the bank. They use the bank’s money at, say, 4% instead of using their money at an investment rate of 10%. Just because they have an auto loan doesn’t mean they are in debt. They have the money to pay the bill at any time that they choose.
“I would also suggest teaching your kids what makes up their credit report and how their decisions affect their score. Use a free website such as Credit Karma to look at this information. It will not only give you a free credit score, it will break down each category and how you fare in each one. Knowledge is power. You can also use this site or www.annualcreditreport.com to look at your credit report to find errors which can be disputed and help your score.”
Teach by example
“I learned about credit the hard way,” Michael Doane (@medoane) writer and marketing expert with CadmiumCD (@cadmiumcd), told us. “After college, I ate ramen every night for a year so I could put every penny to pay off my student loans. I lived in a basement with a cement floor and drove a car that barely ran. To me, the money I was making wasn’t mine, it was my creditors.
“It took about 15 months, but I eventually paid off my loans. I kept at it, living in the same conditions, until I had a decent chunk of change saved up to buy a house. The thing is, I didn’t have a credit card during that time and eventually my credit score dropped off entirely. I didn’t realize it until my then-girlfriend (now-wife) and I went to purchase a home. They told me I couldn’t get the loan because I essentially couldn’t prove my worth as a debtor. All my tradelines had disappeared.
“So, I had to start from the bottom — someone who valued paying off their loans far ahead of schedule, someone who proved that they had what it took to take and pay off a loan. 5 years later I have great credit (780+) simply buying gas every month on a single card and paying it off. I have a home with a very small mortgage for what it’s worth, and a car that’s paid off.
“My case is pretty radical, but I watched my parents lose everything during the recession and I told myself I’d never go through that again. I’d never put other people that depend on me through that.
“The point is, good or bad, your kids will learn through the example you set. Might as well set a good example and teach them through experience rather than observation.”
April Lewis-Parks, Director of Education for Consolidated Credit (@ConsolidatedUS) also emphasized the importance of setting a good example:
It’s important to remember that no matter how old your children are that being a financial role model is an important part of parenting. Setting a good example can help kids be successful with their money. Here are three tips I recommend:
Don’t get swamped with credit card debt. Taking on too much credit card debt can lead to financial difficulty. You’ll be damaging your own finances and your children could be more likely to take on debt in the future because they saw their parents do it. To avoid credit card debt, make sure you practice the best credit card behavior – i.e. always paying on time – and teach the same things to your children.
Allow your children to learn from your mistakes. While you may feel as though hiding your financial mistakes from your children is a good idea, it is better to let them learn from them so they don’t make the same mistakes when they are older, according to U.S. News & World Report. For example, if you find yourself falling short on some bills due to overspending, be sure to let your children know, as it could be useful information for them once they are in charge of their own finances.
Sit down and talk with your child about money. Sometimes, a simple talk goes a long way in helping them. Many teenagers feel as though their parents don’t talk to them enough about budgeting and money, so don’t be afraid to sit your child down and have the talk. Be sure to touch on topics such as savings and long-term planning to help set your child up for a successful financial future.
Use real world experiences
At the end of the day, there’s nothing better than learning first-hand. You might have to toss your kids into the deep end of the financial pool so they can learn to swim.
(Editor’s note: DO NOT ACTUALLY TOSS KIDS WHO CAN’T SWIM INTO POOLS.)
“The reason I had strong financial discipline was because my mom let me fail with money at a young age,” explained Phil Risher, founder of the Young Adult Survival Guide (@yasurvivalguide).
“When I was 16 she gave me a debit card and would load $100 each month so I did not have to ask her for money. One day I was out to eat with my friends and my card was declined. Talk about embarrassing. I came home and complained that the card did not work. We looked up the balance, and I had overdrafted the account.
“This was a life lesson that I am glad I made in my teens when I did not have any real bills because I started to learn how to use self-control with money.”
“Part of financial education for kids is helping them understand the value of a dollar,” Ross told us. “The best way to do this is for them to earn their own money and learn money management skills through practice. Some parents choose to do this through allowance, while others have their children earn money outside of the house. You can also do a combination of both. Consider helping kids divide earnings into threes – one part for saving, one part for spending, and one part for a charity of their choice. This shows kids the valuable skill of saving and the importance of charity.”
Baby’s first credit history
Ross offers a guide for helping your kids build their own credit history:
“Building a credit history is important. A consumer’s credit history can affect their insurance, ability to rent an apartment, get a job, or get a cell phone plan. Credit history is needed to get all types of loans, from mortgages to department store cards.”
“To start building a positive credit history, individuals should acquire and positively manage small lines of credit. The following are credit options for individuals who need to begin building a positive credit history:
Make a child an authorized user on a parent’s card.
Co-sign a credit card with your child. Co-signers on an account are equally responsible for the loan. Therefore, the loan is on their credit report as well, making a positive or negative impact depending on how the credit is managed.
Have your children open a secured card. Secured cards and loans typically require a cash or collateral security deposit to ensure payment of the debt. The larger the security deposit or collateral, the higher the credit limit granted. The cash security deposit is returned when you close the account with the balance fully paid back
Have your child establish a checking & savings account to build a good banking history.
Make small purchases and pay off balances monthly (Do not apply for too many cards at once).”
If your kid is able to build a maintain a good credit history, this will mean steering clear of bad credit loans and lowers their chances of encountering a predatory lender. While it is definitely possible to fix a damaged credit history, avoiding one in the first place is always the better option.
Start small with household chores
As has been the case for a decade, chores can be something of a “starter job,” as Smith advised:
“Start off simple with weekly chores. Pay your children based on chores they do around the house. Once they understand that money is earned, not given, you can start separating it into jars–one for saving and one for spending. It is important kids learn the fundamentals of saving vs. spending early on so understand saving is a normal thing to do.”
Vasey also suggests putting money into kids hands to practice with:
“If a parent buys them something, the child can work off their debt by doing extra chores and meeting certain expectations. For example keeping their room tidy, cutting the grass, washing the car etc. That, to them, would be working off debt.
“Parents can agree to ‘loan them money in advance’ if it is needed. This allows the child to understand that they have the money available to use if it is needed, but they need to be prepared to work the debt off. This can apply for nearly every trip to the shops, the latest product, or even as gas money for when they want to be driven around.”
Use everything in this guide and come up with your own tricks, and your kids will be financial whizzes before you know it. Teach them well enough, and maybe they’ll be supporting you down the line! You can also learn more about credit in our ebook Credit Workbook: The OppLoans Guide to Understanding Your Credit, Credit Report and Credit Score.