We all have it. None of us want it. Credit and debt are a harsh reality for many of us. Whether we have it or are avoiding it like the plague, it's time to sit down with our children to teach them the in’s and out’s (and all the icky in between’s) of using credit.
Part of preparing your child to learn about credit is to prepare yourself. You don't need to be a financial expert, but you should know the basics about how credit cards work, including common fees and interest and how credit cards can affect credit scores.
The first step is to start early. Money is something that needs to be up for open discussion. There is absolutely nothing wrong with living on a budget, even a very tight one. Talk to your kids about budgets and what it takes to stay in budget. Using allowances to help them learn to earn and save money will get them ready to learn about credit.
Once your kids have a good handle on basic cold hard cash, move them onto an actual checking account so they can learn the banking basics. Let them start with the checks and learn how to balance the checkbook before giving them their first piece of actual plastic.
When your child is ready for the debit card, it's also time to talk about credit. Even though the debit card is not a credit card, it will be their first introduction to easily spending potentially large amounts of money in one simple swipe. This is great practice for the real deal. Just make sure that when you set the account up, you tell the bank not to authorize any charges that will result in an overdraft of the account. This will save both you and your child from very expensive hassles later on.
You have set up a great foundation of financial knowledge and now you can capitalize on it. Don't forget to praise the good, such as saving money and not writing bad checks, and explain how to learn from the mistakes.
Here are a few key talking points to bring up with your child.
- Credit is not free money. It can sure feel like it when you are standing in line with the item you want so badly staring at you enticingly. All you have to do is make one simple swipe and it's all yours. This is where talking about interest comes in. If he cannot pay for it within the month, he will be charged interest, which means the item is actually more expensive than the sticker price.
- Keep track of your charges. Emphasize that keeping track of what you spend and where is important. Kids (teens especially) tend to have selective memories when it comes to money. Give them a small ledger or an app on their phone that will allow them to track any charges and spending.
- Use yourself as an example. Good credit or bad, your own credit report and credit card statements are a wealth of knowledge for your kids. If you have good credit, get a credit report and show your kids what you did right. Tell them the steps you take to pay off your credit cards. If you have poor credit, whip out that credit report and tell the cautionary tale. Show them what not taking care of your credit can do.
Do you feel your child is ready for her own credit card? The first instinct may be to run out and buy a pre-paid credit card. Resist! These cards are so full of fees they're just not worth it. Instead, find a card with a low credit limit and cosign for them. This way if they do make the mistake of spending too much, it won't be disastrous for either of you.
Credit can be a good thing. It helps us pay for things that we would normally be unable to afford such as homes, cars and college. Take every step you can to set your child up for a smart financial future.
Kerry Chafin is a freelance writer from Independence and About.com's guide to Mom Recommends.