5 Ways to Teach Your Kids About Credit
A version of this article originally appeared on Learnvest.com.
Teaching credit is a little like teaching good manners—you need to have it, and you know when you need it, but it’s hard to explain exactly what it is.
Sarah Cook has built her reputation on teaching parents how to teach their kids about money. She is the founder of RaisingCEOKids.com and co-author of The Parents’ Guide to Raising CEO Kids ($12, amazon.com).
Your kids “are going to be learning by watching you,” Cook says. “Before we actually talk to them about money, they are learning through emotion how money should be respected, how it should be talked about.”
Credit is one of those concepts we teach without realizing. Instead of springing the concept on your children when they get their first credit cards, ease them into their understanding to prevent mistakes (post-college credit card debt, anyone?) down the road. Start with the basic concepts as your child gains an awareness of money in general and move on to the advanced ones as she builds the maturity to understand them.
Lesson 1: What Credit Means
Explaining credit to a child can be tricky. (“Oh, it’s just a three-digit number that can prevent you from getting a good
interest rate on your loans.”) But if your child can understand earning, borrowing, and paying money, she can understand the
concept of credit. Later, as your child’s understanding grows, you can go into more advanced lessons such as the difference between good and bad debt, why you should never take out loans for more than you can afford or the role of a co-signer.
How to teach it: Cook recommends starting simple, the way she did with her children: “Every place that we borrow money from tells a credit agency about how well we did on paying that money back. Your credit report is like a report card on how well you did on paying everyone back.” For guidance on ways to subtly start teaching kids when they’re still young (starting when they’re toddlers), check out this timeline for teaching kids about credit.
Meanwhile, as more advanced concepts come up in everyday life, explain them in context. For example, if you’re trusting your teenager with a credit card for emergencies, whip out the statement to explain the role of interest and why you pay your statements in full, rather than just opting for the minimums. If she’s learning to drive and asking about a car, talk about how people without credit often need co-signers, and explain the responsibilities of that role.