Teach Your Kids About Credit Scores and Borrowing Money

224
Teach Your Kids About Credit Scores and Borrowing Money

Out of all the important things your child should learn, financial literacy is probably at the bottom of the list.

After all, your kid is still in school, so your precious one still relies on an allowance. He’s not earning a salary yet, so why bother teaching credit for kids?

Well, millions around the world are buried in debt because of poor money management. Teach kids credit, and they’re likely to grow as financially stable adults.

Early financial education can help your son or daughter with a crucial part of adulthood.

Why Teach Kids About Credit?

As of early 2020, Americans have accrued a staggering total of $14.3 trillion in consumer debt

It’s accumulating credit card debts, mortgages, and car loans, and many are still struggling to pay them off. 

Some people shouldered these debts for valid reasons, but others took them out of impulse. Despite the sketchy terms and advertiser disclosures, they borrowed beyond their means.

More importantly, teaching kids credit and other financial subjects could have prevented them.

Financial education can impart wise spending habits that will help your child in adulthood. Once your kid lives on their own, they’ll have to handle personal finance efficiently.

How Do You Teach Credit?

How Do You Teach Credit?

Much like everything else, you have to start teaching credit for kids early.

Ingrain these ideas in your child, and he’ll carry them into adulthood. Before you teach kids credit, it’s best to introduce money basics when they’re 3-5 years old. 

After all, credit is borrowed money that you promise to pay later. When a child understands how money works, it would be easier for them to learn how credit functions.

You could start by playing games where you pretend to use money. For example, teach your kids by giving them play money and “selling” them their toys. 

This game should teach your child that money is exchanged for products and services. It will help them see that money runs out, so they should decide their purchases carefully.

It instills the consequences of spending, making it easier to teach kids credit. In turn, it will facilitate their lessons on credit.

Even better, this early step in teaching credit for kids doesn’t have to be expensive. Use your imagination to use stuff you already have or to create your financial education method.

Once they enter elementary school, you could train them to budget and save using their allowance.

For instance, give them daily or weekly funds for all their needs at school. Keep the amount constant as much as possible, so they’ll have to spend wisely.

Then, require them to leave a dollar in a jar every day, so they can pay for a bike or anything they want. This will emphasize the importance of setting money aside, so you can teach kids credit easier.

Such exercises help your child realize the value of money. Once you teach credit for kids, your child would understand your lessons better.

How Do You Explain Credit to a Child?

How Do You Explain Credit to a Child?

Once your children reach middle school or high school, it’s time to teach your kids how credit works.

Then, explain how they should handle debts to improve their credit score. Elaborate on how their credit report and rating will affect their adult life.

It’s never too late to teach credit for kids, even if you’re starting at their teen years. For example, you could teach spending habits by requiring them to budget their gas allowance.

Teaching kids credit today raises proper adults for tomorrow.

What is Credit?

Credit is an “IOU” for products and services that people couldn’t afford at the moment. 

Typically, the pending repayments have interest rates, so borrowers end up paying more than what they borrowed. 

Credit or debt could either be beneficial or detrimental to personal finance.

Good debts like education could eventually help you earn more. Bad debts are usually impulsive purchases that trap you in a needless repayment cycle.

Sadly, people may burden themselves with excessive debt if they aren’t careful. Consequently, teaching kids credit early could prevent their financial ruin.

When teaching credit for kids, you must emphasize the importance of choosing debts wisely. If you’ve taught the value of money earlier, then you could impart this lesson much smoothly.

You can start by giving your child their very own credit card. Thankfully, most banks have multiple checking options for teens, so it’s easy to find one that suits your needs.

Eventually, you may include your kids as authorized users of your credit card. This could help them build credit easier, but their spending mistakes could damage your credit rating.

No matter what method you choose, you should let them handle their finances. Teaching kids credit won’t help if they can’t practically apply your lessons.

Credit Scores

The next step in teaching credit for kids is explaining how credit scores function.

Credit card companies take note of their clients’ expenditures, then they relay the data to credit institutions. Then, they compile and analyze these credit histories into credit reports.

These credit reports have a three-digit number called a credit score. Credit card issuers pull up this info to determine the appropriate terms and conditions for every client.

Consequently, your kid must learn how his borrowing habits affect his credit report. They should learn how debts and credit cards work, so they can make them work for their finances.

One of the main credit score factors is payment history, so diligent payments significantly improve your rating. When teaching kids credit, they should learn to pay debts on time.

This applies especially to credit cards since they report back to credit institutions. Moreover, the bank may charge penalties if they fail to repay consistently.

How to Get Good Credit

How to Get Good Credit

Lastly, teach credit for kids by promoting the importance of a good credit rating.

The effects of good credit branch out beyond your favorite bank or credit union. It determines the terms for other purchases like mortgages and affects their employment opportunities.

Building credit is an integral part of adulthood, so it’s also an important part of teaching kids credit.

As we’ve mentioned, diligent payments improve your credit rating. Moreover, your kids should use their cards sparingly. 

Credit utilization is also a major part of credit ratings, and it’s the ratio between the current balance and credit limit. If their utilization rises above 30%, their credit score could drop.

Eventually, you could instruct about credit history length, credit mix, and new credit. Though, these might be more applicable when your kids could open their accounts as adults.

Final Thoughts

Teaching kids credit early on could help them grow into financially stable and responsible adults.

You could play games involving pretend money, so you can easily teach credit for kids eventually. Banks and credit unions even have kid-friendly options for your child’s financial education. 

For example, your trusted bank may provide prepaid cards for your kid. Similar to debit cards, these contain a set amount of money that your child should budget.

Much like riding a bike, early financial education has safety protections. You could set limits that will prevent your child from committing major financial mistakes.

Once your kid learned enough, you could take the “training wheels” off and let them handle their finances.

Learn More About Credit for Kids

How do you explain money to a child?

You could play a game with your child where you pretend to buy at a store. Eventually, you may guide your kid in buying real items.

How do you teach kids about finance?

You should take each aspect of money management step-by-step corresponding to his age. For example, you should teach the value of money when he’s roughly 3-5 years old.       

How do you explain credit?

Tell your kid that credit gets you products and services now that must be repaid later. Explain that they must pay on time, and their spending habits could impact their future.